You are financing the purchase of a $600,000 house but you only have enough savings to make a 5% down payment ($30,000). You have two options to finance the property:

Through a $480,000 (80% LTV) first-mortgage at 5% interest plus a second-mortgage for the missing $90,000 (15% LTV) at 10% interest. At origination, 4 points will be charged on both loans Through a $570,000 (95% LTV) first-mortgage at 6.0% interest. No points are charged on this loan. Assume all loans are held to their 20-year maturities and are fixed-rate with monthly compounding and monthly payments.

Use excel tab Scenario 2 to solve this problem.

A. Referring to Scenario 2 above, what is the effective borrowing cost of the combined loan (Option #1)?

(Use two decimals and no percent sign. For example, if your answer is "3.25%", enter "3.25" into the below field)

B. Referring to Scenario 2 above, as the borrower, which loan should you choose? Group of answer choices

Option #1

Option #2

C. Referring to Scenario 2 above and comparing just the 80% LTV first-mortgage with the 95% LTV first-mortgage, what is the incremental yield to the first-mortgage lender for lending the extra $90,000 through the 95% LTV loan? Group of answer choices

6.25%

8.34%

7.56%

8.04%

6.89%

D. Referring to Scenario 2 above, imagine, instead, that the borrower has enough money in the bank to put 20% down on the house. So, the borrower must choose between the 80% LTV loan and the 95% LTV loan.

If the borrower chooses the 95% LTV loan, the borrower can earn a 7.5% yield by investing the incremental $90,000 in a bond fund of similar risk.

Which loan should the borrower choose?

Group of answer choices

95% LTV

80% LTV loan