Ex.1

A potential homeowner has $ 60,000 to

invest in a $ 280,000 home. He can obtain either a $ 220,000 loan at 9.5

percent for 20 years or a $ 180,000 loan at 9 percent for 20 years and a home

equity loan/ 2nd mortgage of $ 40,000 at 13 percent for 20 years. All loans

require monthly payments and are fully amortizing.

a. Which alternative should the borrower

choose, assuming he will be in the house for the full loan term?

b. Would your answer change if the

borrower plans to be in the home for only 5 years.

c. Would your answers to (a) and (b)

change if the 2nd mortgage had a 10 year term?

Ex.2

a homeowner obtain a fully amortizing

mortgage 5 years ago for $95,000 at 11 percent for 30 years. mortgage rates

have dropped, so that a fully amortizing 25 year loan can be obtained at 10

percent. There is no prepayment penalty on the mortgage balance of the original

loan, but three points will be charged on the new loan and other closing costs

will be $2,000. All payments are monthly.

A)should the borrower refinance if he plans to be in the home for the remaining loan term?

Assume the homeowner borrows only an

amount equal to the outstanding balance of the loan.

B)Would your answer change if he planned to be in the home only 5 more years?