Assume you wish to purchase a property for $400,000 and you are evaluating two mortgage choices. You are only able to afford a 10% downpayment, so you have the following options. The first option is a 4.75% fully amortizing, monthly payment, fixed rate loan for 30 years with $2000 in origination fees and no points. This loan is for 90% of the purchase price.

Alternatively, you can borrow 80% of the purchase price at a rate of 3.875%, with $4000 in closing costs. In order to cover the remaining 10%, you will need to take out a 2^ndmortgage with an interest rate of 6.5%, and additional closing costs of $2000. The second mortgage is interest only for the first 5 years, and becomes fully amortizing after that. Both loans are for 30 years, and have fixed rates.

A. Compute the annual percentage rate for each option if it is held for the entire 30 years. Assume there are no extra payments made. Determine which loan is better for the borrower and why.