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Q: Suppose you had to choose between a 12% 30-year mortgage or an 11.5% mortgage with 2 discount points. Which should you choose? Assume you wish to borrow $100,000.
A:
(i) For the 12% mortgage:
N = 360 I = 1.0 PV = 100,000 FV = 0 PMT = $1,028.61
(ii) For the 11.5% mortgage with 2 discount points:
N = 360 I = 11.5/12 PV = 100,000 FV = 0 PMT = $990.29
My questions are...
For (i) why is I = 1.0 and not 12? And why is N = 360 but not 30 years?
For (ii) why do we have to divide 11.5 by 12? And where does the 2 discount points come in?
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