1. You just purchased a house for $150,000 and have a choice between two fixed-rate, fully...

1. You just purchased a house for $150,000 and have a choice between two fixed-rate, fully amortizing mortgage that both are for 30 years. You can get an 80 percent loan at an interest rate of six percent (6%), or alternatively, could obtain a 90 percent loan at 6.5%. You really believe that you have found your dream home so you plan to own the property for the entire loan term

a. What is the incremental cost of borrowing the additional funds you choose the 90 percent loan?

b. How would your answer change if two points were charged on the 90 percent loan? Assume that the points are paid up front, rather than allowing them to be added to the loan balance.

c. What is the incremental cost of borrowing the additional funds from part a, if you decide that you only plan to live in the house for six years, rather than 30?

d. What is the incremental cost of funds, if you have to pay two points up front (as in part b above) and plan to sell the property and move in ten years from when the above mortgage is issued?

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