Susan (borrower) wishes to buy a $500,000 home using Loan 1 (mortgage rate: 10.60%, maturity: 30 years, origination fee: 4 points, prepayment penalty: 2%) with loan to value of 80% or using Loan 2 (mortgage rate: 9.60%, maturity: 30 years, origination fee: 3 points, prepayment penalty: 2%) with loan to value of 70%.

The borrower plans to be in the home for 5 years.

Alternative investments of similar risk can provide 19.00% IRR and borrowing from alternative sources (than

mortgage) would cost effectively 23.00%.

If the borrower has cash for down payment (and origination fee (discount points)) of the larger loan only, which mortgage loan is better for the borrower and why?