A borrower can obtain an 80 percent loan at an 8 percent interest rate with monthly payments. The loan is to be fully amortized over 25 years. Alternatively, he could obtain a 90 percent loan at an 2.5 percent rate with the same loan term. The borrower plans to stay in the home for the entire loan icon.

a. What is the incremental cost of borrowing the additional funds? (Hint: The dollar amount of the loan doesn't affect the answer.)

b. How would your answer change if two points were charged on the 90 percent loan?

c. Would your answer to part

(b) change if the borrower planned to be in the home caly five years?

AppendixLO1