You are thinking of buying a home costing $500,000 with a 20% down payment. You will finance it with a 30-year fixed-rate mortgage. Here are two mortgage quotes (No excel computations are permitted. Use TVM Formulas for every question and show your procedure):

Lender: Bank 1

Rate: 6.250%; APR: 6.269%; Upfront costs: $793; Mo. Payment: $2,463

Lender: Bank 2

Rate: 6.125%; APR: 6.148%; Upfront costs: $989; Mo. Payment: $2,430

a. Show how the monthly loan payment is computed for each mortgage quote.

b. Show how the true interest rate (denoted by APR in the quote) is computed for each quote.

Suppose you select Bank 1.

c. Compute the outstanding loan balance after 15 years.

d. After how many months will the principal portion of the monthly payment begin to exceed the interest portion?

Answer rating: 100% (QA)

SOLUTION a The monthly loan payment can be computed using the TVM Time Value of Money formula for an amortizing loan The formula is PMT P r 1 1 rn where PMT is the monthly payment P is the loan amount ... View the full answer