Sample_Loan_Question

Sample_Loan_Question - Sample Home Mortgage NPV Problem You...

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Sample Home Mortgage NPV Problem You bought a house for $250,000, borrowing $200,000 on a 30-year term loan (with monthly payments). You have two options to finance the house; 1) paying an interest rate of 6.5% in Bank A, or 2) paying an interest rate of 5.75% at Bank B. Assume Bank B charges a fee of 3% of the value of the loan to offer the lower rate. First you need to determine the basic information about the two loan options: Step 1) Determine EAR and EPR of the loan at bank A. Step 2) Calculate the monthly payments if borrowing from Bank A. Step 3) Determine the EAR and EPR of the loan at bank B. Step 4) Calculate the monthly payments if borrowing from Bank B? Next you need the decision making criteria – this is the information you use in the NPV calculation. You plan to stay in this house for the next 4 years. Given the fee of Bank B (3% of the loan) an opportunity cost “RoR” of 10% (APR) and ignoring tax effects, which loan would you prefer? Step 1) Calculate the PV at T
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Sample_Loan_Question - Sample Home Mortgage NPV Problem You...

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