Question

You need to find five different online mortgage lenders.

From these five lenders, find the following mortgage rates: 10 year (if available), 15 year (if available) and 30 year for each of the five lenders.

Convert these rates into Effective Annual Rates (EAR’s).

Discuss which rate is actually the cheapest rate.

Present the rates in a table. List the quoted rate and EAR rate, the lender and the time to maturity.

What are three common mistakes most homebuyers make when looking at quoted mortgage rates?

Based solely on the EAR, which rate is the cheapest? Does this make sense? Explain your answer.

Keeping the time value of money in mind, if an investor chose the 30 year mortgage, what does that say about their opinion of the time value of money?

Why do the different lenders have different rates?

Is the difference in rates going to have a material impact on the cost to the home buyer? Explain your answer.

Solution Preview

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In the table above, the APR in the first column after the lender name is the stated annual percentage rate, the “Rate” is the APR adjusted for fees listed in the third column, and the payment in the fourth column is based on the adjusted APR, that is, the “Rate” in the second column. The fifth column lists the effective annual rate based on the “rate” adjusted for fees and represents the actual monthly payment. The EAR minus the rate is listed next and shows that the effective annual rate is always slightly higher due to the compounding of interest. The “total payments” column lists the sum of all payments that will be made over the life of the loan if the house is never sold. In all cases, the principal is assumed of be $240,000. The final column represent the total interest paid over the life of the loan by subtracting the principal form the total payments. ...
Different Online Mortgage Lenders

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