Question many banks charge points on mortgage loans each, Ask an Expert

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Question: Many banks charge points on mortgage loans. Each point is the equivalent of a 1% charge on the amount borrowed and is paid before the loan is made as part of the closing costs of buying a home (closing costs include points, title fees, attorney's fees, assessor's fees, and so on).

(a) If $100,000 is borrowed for 25 years, for each of the following, find the payment size and the total paid over the life of the loan (including points).

(i) 7½%, compounded monthly, with 0 points

(ii) 7½%, compounded monthly, with 1 point

(iii) 7%, compounded monthly, with 2 points

(b) Which loan in part (a) has the lowest total cost over the life of the loan?

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