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    Financing Options for a Home Loan

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    You're about to purchase a home and your mortgage broker offers you two options.
    Based on the information provided below, which option should you choose? (annual compounding is acceptable)
    Option 1 Option 2
    Mortgage Amount $200,000 Mortgage Amount $200,000
    Interest rate 7.0% Interest rate 7.5%
    Closing Cost $4,500 Closing Cost None

    Additional Information (applicable to both options)
    - You can invest surplus cash at 6%
    - You're planning to refinance the mortgage at the end of the 5th year

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    https://brainmass.com/business/finance/145800

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    Solution Preview

    For the first solution, I've made the assumption that the loan is IO (interest only) for 5 years. The total cash out over the five years can be computed as:

    Option 1: 200,000 x 7% x 5 years + $4500 = $74,500
    Option 2: 200,000 x 7.5% x 5 years = $75,000
    Earnings for investing the $4500: 4,500 x 6% x 5 ...

    Solution Summary

    The solution compares to the two options given by calculating the total costs over the five year period. Beyond that, the solution discusses several more options that could be applicable.

    $2.49

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