1) Amelia has two choices for financing her house. Loan A is a $175,000 fixed-rate mortgage at 5.25 percent interest amortized over 20 years; she will be required to pay 1.5 points in conjunction with this loan. Loan B is a $190,000 fixed-rate mortgage at 5.5 percent interest amortized over 30 years with one point required at origination. Whichever loan she chooses, Amelia expects to hold the loan for five years.

a) What Amelias incremental borrowing cost (IBC) of choosing Loan B instead of Loan A?

b) Interpret the IBC you just calculated and indicate how Amelia can use it to decide which loan to choose.