Financial Markets and Institutions
Financial Markets and Institutions
6th Edition
ISBN: 9780077641825
Author: SAUNDERS
Publisher: Mcgraw-Hill Course Content Delivery
bartleby

Concept explainers

bartleby

Videos

Question
Book Icon
Chapter 7, Problem 12P

a)

Summary Introduction

To determine: The best option from the given two options.

a)

Expert Solution
Check Mark

Explanation of Solution

For both the mortgage the down payment will be 25% of the buying price, or a down payment of $43,750(0.25×175,000) at closing and borrow $131,250 through the mortgage.

In case if the option 2 is selected and make payment of $2,625 ($131,250×0.02) in points and gets $128,625($131,250$2,625) at closing, although the mortgage principal is $131,250. To ascertain the best option, initially the monthly payments for both options should be ascertained as follows:

  • Option 1:

$131,250=PMT{[1(1(1+0.050012)15(12))](0.050012)}Solve for PMT, we get $1,037.92.

  • Option 2:

$131,250=PMT{[1(1(1+0.047512)15(12))](0.047512)}Solve for PMT, we get $1,020.90.

In exchange for $2,625 upfront, option 2 decreases the monthly payments of mortgage by $17.012. The present value of these savings (ascertained at 4.75%) over the 15 years is as follows:

PV=$17.012{[1(1(1+0.047512)15(12))](0.047512)}=$2,187.14

Option 1 is best choice because the present value of monthly savings, $2,187.14, is less than the points paid up front, $2,625.

b)

Summary Introduction

To determine: The best option from the given two options.

b)

Expert Solution
Check Mark

Explanation of Solution

In case if the option 1 is selected and make payment of $2,625 ($131,250×0.02) in points and gets $128,625($131,250$2,625) at closing, although the mortgage principal is $131,250. If the option 2 is selected and make payment of $3,937.5 ($131,250×0.03) in points and gets $127,312.5($131,250$3,937.5) at closing. The difference in savings on the point is $1,312.5. To identify the best option the monthly payments should be computed for both options as follows:

  • Option 1:

$131,250=PMT{[1(1(1+0.048512)15(12))](0.048512)}Solve for PMT, we get $1,027.69.

  • Option 2:

$131,250=PMT{[1(1(1+0.046812)15(12))](0.046812)}Solve for PMT, we get $1,016.17.

In exchange for $1,312.50 upfront, option 2 decreases the monthly payments of mortgage by $11.52. The present value of these savings (ascertained at 4.68%) over the 15 years is as follows:

PV=$11.52{[1(1(1+0.046812)15(12))](0.046812)}=$1,487.94

Option 2 is best choice because the present value of monthly savings, $1,487.94, is greater than the points paid up front, $1,312.50.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Finance
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Text book image
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:9781260013962
Author:BREALEY
Publisher:RENT MCG
Text book image
Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage
Text book image
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Text book image
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Text book image
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Mortgages explained UK; Author: Finder - UK;https://www.youtube.com/watch?v=mdmIDvgRRLs;License: Standard Youtube License