Question

Use the formula P(r/n)/[1−(1+r/n)⁻ⁿᵗ] to determine the regular payment amount, rounded to the nearest dollar. Consider two mortgage options for a $120,000 mortgage.

Mortgage A: 15-year fixed at 7.25% with closing costs of $2500 and 1 point.
Mortgage B: 15-year fixed at 6.25% with closing costs of $2500 and 2 points.
a) Mortgage A
b) Mortgage B
c) Both have the same total cost
d) Insufficient information to determine

Answer 1

To determine the regular payment amount for Mortgage A and Mortgage B, use the given formula: P(r/n)/[1−(1+r/n)⁻ⁿᵗ]. Plug in the values and calculate the regular payment amount for each mortgage.

Step-by-step explanation:

To determine the regular payment amount for Mortgage A and Mortgage B, we will use the given formula:

P(r/n)/[1−(1+r/n)⁻ⁿᵗ]

For Mortgage A:

Principal (P) = $120,000

Rate (r) = 7.25% = 0.0725

Compounding Frequency (n) = 12

Time (t) = 15 years

For Mortgage B:

Principal (P) = $120,000

Rate (r) = 6.25% = 0.0625

Compounding Frequency (n) = 12

Time (t) = 15 years

By plugging the values into the formula, we can calculate the regular payment amount for each mortgage.