
Concept explainers
a)
To determine: The best option from the given two options.
a)

Explanation of Solution
For both the mortgage the down payment will be 20% of the $115,000 buying price of a new home, or a down payment of 23,000
In case if the option 2 is selected and make payment of $1,840
- Option 1:
- Option 2:
In exchange for $1,840 upfront, option 2 decreases the monthly payments of mortgage by $9.90. The
Option 1 is best choice because the present value of monthly savings, $1,248.06, is less than the points paid up front, $1,840.
b)
To determine: The best option from the given two options.
b)

Explanation of Solution
In case if the option 1 is selected and make payment of $920
- Option 1:
- Option 2:
In exchange for $1,380 upfront, option 2 decreases the monthly payments of mortgage by $17.047. The present value of these savings (ascertained at 10%) over the 30 years is as follows:
Option 2 is best choice because the present value of monthly savings, $1,942.52, is less than the points paid up front, $1,380.
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Chapter 7 Solutions
Financial Markets and Institutions (The Mcgraw-hill / Irwin Series in Finance, Insurance and Real Estate)
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