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5. Suppose you have two options on a $150,000, 30-year, fixed-rate mortgage. Option one is a...

5. Suppose you have two options on a $150,000, 30-year, fixed-rate mortgage. Option one is a 5.25% contract rate with 2.00 points. Option two is 5.00% contract rate but you have forgotten how many discount points are charged. Both loans have a 3% prepayment penalty for the first eight years of life.

A. (1 pt) Calculate the number of points on option two that would equalize the

APRs of the two loans.

Answer: ________

B. (1 pt) Calculate the number of points on option two that would equalize the effective costs of the two loans over a five-year holding period.

Answer: ________

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It is solved using MS Excel and financial functions.

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