A borrower can obtain an 85 percent loan with an 6 percent interest rate and monthly payments. The loan is to be fully amortized over 25 years. Alternatively, he could obtain a 95 percent loan at an 6.5 percent rate with the same loan term. The borrower plans to own the property for the entire loan term. Required: a. What is the incremental cost of borrowing the additional funds? (Hint: The dollar amount of the loan does not affect the answer.) b. What is the incremental cost of borrowing the additional funds if 2 points were charged on the 95 percent loan? c. What is the incremental cost of borrowing the additional funds if the borrower planned to own the property for only five years?
A borrower can obtain an 85 percent loan with an 6 percent interest rate and monthly payments. The loan is to be fully amortized over 25 years. Alternatively, he could obtain a 95 percent loan at an 6.5 percent rate with the same loan term. The borrower plans to own the property for the entire loan term.
Required:
a. What is the incremental cost of borrowing the additional funds? (Hint: The dollar amount of the loan does not affect the answer.)
b. What is the incremental cost of borrowing the additional funds if 2 points were charged on the 95 percent loan?
c. What is the incremental cost of borrowing the additional funds if the borrower planned to own the property for only five years?
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