A potential homeowner has $60,000 to invest in a $280,000 home. He can obtain either a $220,000 loan at 9.5 percent for 20 years or a $180,000 loan at 9 percent for 20 years and a ne equity loan/second mortgage of $40.000 at 13 percent for 20 years. All loans require monialy payments and are fully amortizing.

a. Which alternative should the borrower choose, assuming he will be in the house for the full loan term?

b. Would your answer change if the borrower plans to be in the home only five years?

c. Would your answers to

(a) and

(b) change if the second mortgage had a 10-year term?

AppendixLO1