A borrower is purchasing a property for $200,000 and can choose between two possible loan alternatives.  Loan A is a 90% loan for 25 years at 8% interest and 2 points and Loan B is a 95% loan for 25 years at 8.75% interest and 1 point. Assume the loans will be held to maturity, what is the incremental cost of borrowing the extra money? Assume that the loans will be repaid in 5 years.  What is the incremental cost of borrowing the extra money? Rework parts (a) and (b) assuming the lender is charging 3 points on Loan A and 2 point on Loan B.  What is the incremental cost of borrowing?

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Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.