1

To demonstrate the marginal or incremental cost of borrowing, please consider the following. For the purchase of a $100,000 house, two loans can be considered. One Loan of $80,000 for 25 years at 6% and another loan for $90,000 for 25 years at 7%. Please calculate the incremental cost to acquire the or additional cost of $10,000 should he choose the $90,000 loan over the $80,000 loan. What are the monthly payments on each of the loans? Consider the payment amount difference. We are solving for the annual rate of interest compounded monthly that makes the present value of the difference in mortgage payments equal to $10,000. What would it cost on a percentage basis to Borrower the additional $10,000? What alternatives would the Borrower have to taking the higher mortgage loan? What is the LTV on the $90,000 mortgage and what is the LTV on the $80,0000 mortgage?

Problem 2

If the monthly payments on an existing loan is $576.00 and the monthly payments on a new loan is $510.11, what is the difference in monthly payments? How much would the cost savings be over a 30-year period?

Problem 3

A potential home buyer is wondering about her credit card accounts and the effect that might have on her credit score which will be evaluated when she applies for a mortgage loan. At present she has three accounts with credit limits and balances as follows:

Account Limit Outstanding Balance

#1 $5,000 $3,000

#2 $10,000 $5,000

#3 $15,000 $8,000

She would like to transfer the balance in account #2 to account #3 in order to save the membership fee and because the interest charges for account #2 are higher than the others. If she does this the account #2 would be closed.

How much credit capacity is she currently using before any transfer?

If she cancels account #2 and transfers the balance to account #3, what will be the capacity used now?

After the transfer, how much would an increase in the total credit limit have to be in account #3 to restore the total capacity used in all accounts prior to the transfer?