Question: A borrower is faced with choosing between two loans, Loan A is available for $75,000 at 6% interest for 30 years, with 3 points to

  1. A borrower is faced with choosing between two loans, Loan A is available for $75,000 at 6% interest for 30 years, with 3 points to be included in closing costs. Loan B would be made for the same amount, but for 6.5% interest for 30 years, with zero points to be included in the closing costs. Both loans will be fully amortizing.

  1. If the loan is repaid after 20 years, what are the effective interest rates (i.e. effective cost of borrowing) of loan A and B? Which loan would be the better choice?

  1. If the loan is repaid after 10 years, what are the effective interest rates (i.e. effective cost of borrowing) of loan A and B? Which loan is the better choice?

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