Question

(Mortgage Loans MC)

A first-time home buyer is given the choice of two loans:


Loan A Loan B
$390,000
15 year-fixed
4 discount points
M = $3,509.71 $390,000
15 year-fixed
0 discount points
M = $3,659.86


How much does the home buyer save in total by choosing Loan A?
$27,027.00
$11,427.00
$26,351.02
$42,627.05

Answer 1

For Loan A:
Loan amount: $390,000
Monthly payment: $3,509.71
Total payment over 15 years: $3,509.71/month * 12 months/year * 15 years = $632,748.60
For Loan B:
Loan amount: $390,000
Monthly payment: $3,659.86
Total payment over 15 years: $3,659.86/month * 12 months/year * 15 years = $658,574.80
Savings for Loan A:
Total savings=Total payment of Loan B−Total payment of Loan A
Total savings=$658,574.80−$632,748.60
Total savings=$658,574.80−$632,748.60
Total savings = $25,826.20
Total savings=$25,826.20
Discount points for Loan A:
Cost of discount points for Loan A=4×1%×$390,000
Cost of discount points for Loan A=4×0.01×$390,000
Cost of discount points for Loan A=4×0.01×$390,000
Cost of discount points for Loan A=$15,600
Cost of discount points for Loan A=$15,600
Net Savings:
Net savings=Total savings−Cost of discount points for Loan A
Net savings=$25,826.20−$15,600
Net savings=$25,826.20−$15,600
Net savings=$10,226.20
Net savings=$10,226.20
So, if we're rounding to the closest the answer would be $10,226.20 but that isn't an option. So if we round up we'd get $11,427.00

Answer 2

great