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Part 1 You are buying a $350,000 home and are deciding between two fixed rate mortgage options. The 80% LTV option has an interest rate

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Part 1 You are buying a $350,000 home and are deciding between two fixed rate mortgage options. The 80% LTV option has an interest rate of 8% over 30 years. The 90% LTV option has an interest rate of 8.5% over 30 years with 2 discount points. -What is the incremental borrowing cost when choosing the 90% LTV option over the 80% LTV option? -Why is the effective borrowing cost higher for the 90% LTV option? Part 2 Assume that you chose the 80\% LTV mortgage from the previous section, but after 10 years are thinking about refinancing for $2,500. You will only be in the home for another 5 years. The new loan would be an ARM. Interest rates on 20 -year ARMS are currently 6%. Interest rates are expected to increase to 8% in years 2 and 3 and then to 9% in years 4 and 5 . - Find the return on your $2,500 refinancing cost. Should you refinance? - If interest rates rose faster than expected, how might this change your answer? (No calculation is needed. Explain in words.) - How would larger than expected increases in interest rates impact the supply and demand for homes? Part 3 When you made the offer on your home in Part 1, you thought you were getting a General Warranty deed. It turns out that the owner can only give you a Quitclaim deed. How might this impact the market value of the property and your ability to get mortgage financing? (Hint: Relate value not just to the physical property but also the bundle of property rights.)

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