Assume that you have purchased a home and can qualify for a $300,000 loan. You have narrowed your mortgage search to the following two options: Mortgage B
Loan term: 15-years
Annual interest rate: 4.5 percent
Monthly payments Up-front financing costs: $7,500
Mortgage A
Loan term: 30 years
Annual interest rate: 5 percent
Monthly payments Up-front financing costs: $5,500
Discount points: 3 Note: 1 discount point = 1% of loan amount
a) (3 points) Calculate the effective borrowing cost to the borrower.
b) (3 points) Compute Lender's Yield.
c) (3 point) Based on the effective borrowing cost, which loan would you choose? Explain your answer using your calculations from a) and b).