Midterm question 7

For questions 7– 9 consider the following mortgage terms for a standard US mortgage:
• Option A: 7% No points
• Option B: 6.75%, Two points

7. Consider a $120,000.00 loan. What would the monthly payments be if you took the loan with
no points, i.e., option A?
(a) $ 798.36
(b) $ 805.86
(c) $ 335.28
(d) None of the above.

To calculate the payments:
Assume 30 yrs fixed rate loan

$120,000(A/P, i,n)
$120,000(A/P, i=effective interest rate, n=360)

Effective interest rate = (1 + $(.07/12)) ^1 -1 = .07/12$
The denominator 12 represents 12 months in a year.
The exponent 1 represents 1 month in a month.

120,$000[(.07/12)(1 + (.07/12))^3^6^0]/[(1 + (.07/12))^3^6^0 -1]$

=$798.363

So choice A is the correct answer.

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