## Related questions with answers

Consider the following pairs of loan options for a $\$ 120,000$ mortgage. Calculate the monthly payment and total closing costs for each option. Explain which option you would choose and why.

Choice $1$: $30$-year fixed rate at $3.5 \%$ with closing costs of $\$ 1000$ and no points

Choice $2$: $30$-year fixed rate at $3 \%$ with closing costs of $\$ 1500$ and $4$ points

Solution

VerifiedThe **monthly payments** can be calculated using the formula

$\text{PMT} = \dfrac{P \times \left( \dfrac{\text{APR}}{n} \right)}{\left[ 1 - \left(1 + \dfrac{\text{APR}}{n} \right)^{(-nY)} \right] }$

where $\text{PMT}$ is the regular payment amount, $\text{APR}$ is the annual percentage rate in decimal form, $P$ is the amount borrowed, $n$ is the number of payment periods per year, and $Y$ is the loan term in years.

Compute for the month payments $PMT$ for each loan option by substituting the given quantities. Take note that for both cases, we have $\textcolor{#c34632}{P = \$120,000}$.

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