Question
1. A borrower is purchasing a property for $400,000 and can choose between two possible loan alternatives. The first is a 90% loan for 30
1. A borrower is purchasing a property for $400,000 and can choose between two possible loan alternatives. The first is a 90% loan for 30 years at 7.0% interest and the second is an 80% loan for 25 years at 6.0% interest. Assume the loan will be held to maturity. What is the incremental interest cost of borrowing the extra money? (10 points)
Loan 1 Loan 2
Loan to value ratio 90% 80%
Interest rate 7.0% 6.0%
Term 30 years 25 years
Amt Borrowed
Monthly Payments
2. An investor wants to purchase a mortgage from the local bank. The original loan amount was $300,000 for 30-years at an interest rate of 4%. The loan was made three (3) years ago. If the investor requires a 4.5% return, how much will be paid for the mortgage? What is the book value of the mortgage, assuming regular payments and no prepayments, etc.?(10 points)
3. A borrower has secured a 20-year, $180,000 loan at 7%. Five years later, the borrower has the opportunity to refinance with a fifteen year mortgage at 6.5%. The up front fees, which will be paid in cash, are $2,000. Assume the loan will be held until maturity and compute the return on refinancing. Should she refinance? Why or why not? (10 points)
4. Joe is offering a house for sale for $280,000 with an assumable loan which was made 6 years ago for $200,000 at 8% over 20 years (monthly payments). Larry is interested in buying the property and can make a $56,000 down payment and assume Joe's mortgage. A second mortgage can be obtained for the balance at 9% for 5 years (monthly payments). What is the effective cost of the combined loans if Larry would like to compare this financing alternative to obtaining a first mortgage for the full amount? (10 points)
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