Suppose, for a property with a purchase price of $100,000, a borrower can obtain a loan with 80% LTV for 8 percent interest with monthly payments (Loan #1); this loan is to be fully amortized over 25 years. A second alternative (loan #2) for this propery could be obtained with 90% LTV at an 8.5 percent interest rate and monthly payments for 25 years.

a. If the borrower plans to own the property for the entire loan term, what is the incremental cost of borrowing the additional funds with Loan #2?

b. What would be the incremental cost of borrowing the additional funds with Loan #2 if the borrower plans to own the property for only 5 years?