A property costs $100,000. A borrower can obtain an 80% loan with an 8% interest rate...

A property costs $100,000. A borrower can obtain an 80% loan with an 8% interest rate and monthly payments. The loan is to be fully amortized over 25 years. Alternatively he could obtain a 90% loan at an 8.5% interest rate with the same loan term. (annualize percentages)

A. The borrower plans to own the property for the entire loan term. What is the incremental cost of borrowing the additional funds?

B. How would your answer change if two points were charged on the 90% loan?

C. How would your answer to (b) change if the borrower planned to own the property for only five years?

Expert Solution

A.

The borrower needs to pay additional (127411.3-105235.9)=$22175.4 for borrowing additional funds

C. Similarly, for 5 year loan below is the scenario:

	Scenario 1	Scenario 2
Property Value	100000	100000
Loan Amount (PV)	80000	90000
Annual Interest Rate	8%	8.50%
Monthly interest rate	0.67%	0.71%
Tenure (nper) (in months)	60	60
Monthly payment (PMT)	($1,622.11)	($1,846.49)
Total Interest paid	17326.69258	20789.26917

Hence, additional interest payment in the second scenario= (20789.26-17326.69)=$3462.57

jeff jeffy answered 5 months ago

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