A. Mortgage AlternativesActions for ‘A. Mortgage Alternatives’SubscribeHide DescriptionThis issue has three parts. Application of time value of money principles can help youmake decisions on loan alternatives. This exercise requires you tocompare three mortgage alternatives using various combinations andpoints. Points on a mortgage refer to a payment that is made up front tosecure the loan. A single point is a payment of one percent of theamount of the total mortgage loan. If you were borrowing $200,000 asingle point would require an upfront payment of $2,000. When you are evaluating alternative mortgages, you may beable to obtain a lower rate by making an upfront payment. Thiscomparison will not include an after-tax comparison. When taxes areconsidered, the effective costs are affected by interest paid and theamortization of points on the loan. This analysis will require you tocompare only before-tax costs. Bloomberg.com provides a mortgage calculatorthat allows you to compare the effective costs on alternativemortgages. You are considering three alternatives for a $250,000mortgage. Assume that the mortgage will start in December, 2002. Themortgage company is offering you a 6% rate on a 30-year mortgage with nopoints. If you pay 1.25 points, they are willing to offer you themortgage at 5.875%. If you pay 2 points, they are willing to offer youthe mortgage at 5.75%. 1. What are the mortgage payments under the three alternatives? 2. Which alternative has the lowest effective cost? 3. Can you explain how the effective rate is being calculated?
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