A borrower finds that the incremental cost of borrowing associated with moving from an 80% LTV loan to an 85% LTV loan is 14%. A second loan is available for 5% of the purchase price of the house and the rate on this loan is 15% with no closing costs.

Which of the following statements is correct?

a. The single loan at 85% LTV is cheaper than using an 80% LTV loan in combination with a 5% second mortgage.

b. The single loan at 85% LTV is more expensive than using an 80% LTV loan in combination with a 5% second mortgage.

What is the effective cost of a combination of an 80% mortgage at 3% and a second mortgage (for 10% of the purchase price) at 4%? Both mortgages carry a 30-year term and have no points/closing costs.

The incremental cost of borrowing may also be referred to as the marginal cost of borrowing.

True/False

A 10-year mortgage carries an interest rate of 2.00% and a 15-year mortgage carries an interest rate of 2.50%. Please use the dropdown boxes to best describe the incremental borrowing of the 15-year mortgage vs the 10-year mortgage for a $100,000 loan.

The incremental borrowing is best described as borrowing $______

every month from month 1 to month 120, which is repaid with payments of $________ from months 121 to 180. (Fill in the blank)

A 10-year mortgage carries an interest rate of 2.00% and a 15-year mortgage carries an interest rate of 2.50%. What is the incremental borrowing cost of the 15-year loan over the 10-year loan?