8. Mr. X has an existing loan with monthly payments of $1000. The interest rate on the loan is 10.0% and the remaining loan term is 10 years. The home is now worth $220,000 and Mr. X would like to borrow an additional $50,000 on his home equity, through a wraparound loan.

Mr. Y , the lender said : Terms of the wraparound loan are 12.25% interest with monthly payments fully amortize by equal monthly payments through 10 years.

Then Mr. Y try to play smart and said or 15 years. It is all your choice, MR X

(A wrap-around mortgage is a loan transaction in which the lender assumes responsibility for an existing mortgage)

We know that Mr. Y try to play smart because he memorized the rule: interest rate / IRR is always yearly and do not change by changing periods?

But we know that he played stupide, do not we?

So, explain why? Your prove, of his stupidy, must be in numbers. You may consider answering through the two hints below, if you want. 15 points

(Hint1 : how 12.25% interest rate would end up giving different IRR with period changing?

Which choice is better for Mr. X ? 10 years or 15 years.)

(Hint2: It should be by calculating the incremental cost of borrowing the extra $50,000 through a wraparound loan?)