You consider buying a three-bedroom flat in the Frogner-area of the city of Oslo. The market price is NOK 10 million. Accepting an 80% loan-to-value ratio, your friendly bank offers two alternative financing options:

Option 1: A 5.00% per year mortgage loan fully amortized as an ordinary annuity with monthly payments of interest and principal over 25 years.
Option 2: A 4.75% per year mortgage loan fully amortized as an ordinary annuity with monthly payments of interest and principal over 25 years and 2.75 discount points charged at initiation (closing) of the loan. You are asked to answer the following questions:

(a) Independent of the alternative chosen, you plan to terminate the loan after 10 years. Which loan alternative will now be the least costly?

Answer rating: 100% (QA)

1 Market price 2 Loan to value 3 Loan value 1000000000 8000 800000000 4 5 Opti... View the full answer