Homework Answers
Part (a)
Closing cost for choice 1 = 1,450 + 2 points = 1,450 + 2% x 145, 000 = $ 4,350
Closing cost for choice 2 = 1,600 + 1 point = 1,600 + 1% x 145,000 = $ 3,050
Part (b)
Annual payment under choice 1 = PMT (Rate, Nper, PV, FV) = PMT (4.25%, 30, - 145000, 0) = 8,641.75
Annual payment under choice 2 = PMT (Rate, Nper, PV, FV) = PMT (4.05%, 15, - 145000, 0) = 13,087.10
We need to calculate the effective APR of each of the choices after taking into account the closing costs. We can calculate the effective APR using RATE function of excel = RATE (Nper, PMT, PV, FV); FV will be the closing cost.
Choice 1: Effective APR = RATE (30, 8641.75, -145000, 4350) = 4.32%
Choice 2: Effective APR = RATE (15, 13087.10, -145000, 3050) = 4.21%
The effective APR is lower in case of choice 2. Hence, I would choose loan 2.
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