You have decided to purchase a home. The cost of the house is $150,000 and you have four financing options available to you (assume 30-year mortgages with monthly payments and full amortization for all four options).

Mortgage A: 9 percent fixed-rate mortgage, with no discount points or prepayment penalty. The loan-to-value ratio is 80 percent.

Mortgage B: 8.5 percent, fixed-rate mortgage, with 2 discount points and no prepayment penalty. The loan-to-value ratio is also 80 percent.

a. Which of the two fixed-rate mortgages will have the lower effective cost of borrowing to you if you live in the house for 20 years?

b. Which of the two fixed-rate mortgages will have the lowest effective cost to you if you live in the house for 5 years?