Question
DO ON PAPER? Robert can get either of the following two mortgage loans for $500,000: Loan 1: LTV = 80% fully amortizing 30-year term with
DO ON PAPER?
Robert can get either of the following two mortgage loans for $500,000:
Loan 1: LTV = 80% fully amortizing 30-year term with end of month payments. Interest Rate = 8.4%. This loan has 2 points to be paid upfront. It has 1% prepayment penalty if the loan is terminated sooner than 10 years.
Loan 2: LTV = 90% fully amortizing 25-year term with end of month payments. Interest Rate = 9.6% This loan has 2 points to be paid upfront. It has 1% prepayment penalty if the loan is terminated sooner than 10 years.
A. If Robert lives in the house for 30 years, what is his incremental cost of borrowing over his thirty years of home ownership?
B. If Robert sells the house at the end of 6 years what is his incremental cost of borrowing over his six years of home ownership?
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