(Please show formula used)

A homeowner purchases a property for $500,000. He finances the purchase with an 80% LTV, 30-year fully amortizing GPM carrying a 10% interest rate. An 8% rate of graduation will be applied to monthly payments beginning year 2 and the beginning of year 3, only (payments in years 3 and 4 and on are the same). The homeowner will sell the property after 5 years and does not curtail the loan. Upfront fees amount to 3% of the loan amount, and a soft prepayment penalty of 3% applies.

A. [6] What is the first years payment?

B. [2] What is the OLB at the end of year 5?

C. [4] What is the effective cost of the loan?

D. [2] All else equal, would you expect the note rate for an equivalent fully amortizing, constant payment mortgage to be <, > or = to 10%? Explain your answer.