You are a homebuilder with excess houses in inventory and thelocal economy heading towards a recession. In order to stimulatehome sales, you offer the following promotion: 1.5% annual interestfor the first 3 years of your new mortgage!
You have contracted with a local bank to offer 30-year, fullyamortizing mortgages for your buyers at a rate of 3.95% per yearwith a .8 Loan-to-Value (LTV) ratio.
You have agreed to pay the bank the Present Value of thedifference in monthly payments between their rate of 3.95%/year andyour “teaser” rate of 1.5%/year.
Your promotion is working, and soon you have a home undercontract to sell for $300,000. Using a Discount Rate of 5%/year,what is the amount which you willpay the bank at closing tocompensate them for the 3-year teaser interest rate?
Use Excel. Use $$$ please
