Effective Cost of Two or More Loans

An investor has $75,000 to invest in a $500,000 property. The investor can obtain either a $425,000 loan at 5.5 percent for 30 years or a $375,000 loan at 4.5 percent for 30 years and a second mortgage for $50,000 at 7.0 percent for 20 years. All loans require monthly payments and are fully amortizing.

a. Which alternative should the investor choose, assuming they will own the property for the full term?

b. Recalculate (a) assuming the second mortgage has a 10-year term?