Problem $6-6$

An investor has owned a property for $15$ years, the value of which is now to $$200,000.$ The balance on the original mortgage is $$100,000$ and the monthly payments are $$1,100$ with $15$ years remaining. The investor would like to obtain $$50,000$ in additional financing. A new first mortgage for $$150,000$ can be obtained at a $12\mathrm{.}5$ percent rate. A new second mortgage for $$50,000$ can be obtained at a $14$ percent rate with a $15-$year term. Alternatively, a wraparound loan for $$150,000$ can be obtained at a $12$ percent rate and a $15-$year term. All loans are fully amortizing.

Required:

a$.$ What is the incremental return on the wraparound loan?

b$.$ What is the effective cost of the combination of the existing mortgage and the new second mortgage?

c$.$ Which alternative is better for the borrower?

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What is the incremental return on the wraparound loan?

Note: Do not round intermediate calculations. Round your final answer to $2$ decimal places.

Incremental return

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