A borrower can obtain an 80 percent loan with an 8% interest rate and monthly payments. The loan is to be fully amortized over 25 years. Alternatively, he could obtain a 90 percent loan at an 8.5% rate with the same loan term. The borrower plans to own the property for the entire loan term.

a. What is the incremental cost (%) of borrowing the additional funds? (Hint: the dollar amount of the loan does not 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 own the property for only ve years?

= [tex]RATE(12\times 25,PMT(\frac{8.5 \ percent}{12} ,12\times 25,1\times 90 \ percent)-PMT(\frac{8 \ percent}{12} ,12\times 25,1\times 80 \ percent),1\times 90\ percent-1\times 80 \ percent)\times 12[/tex]

= [tex]12.26037049[/tex]%

(b)

= [tex]RATE(12\times 25,PMT(\frac{8.5 \ percent}{12} ,12\times 25,1\times 90 \ percent)-PMT(\frac{8 \ percent}{12} ,12\times 25,1\times 80 \ percent),1\times 90 \ percent\times (1-2 \ percent)-1 \times 80 \ percent)\times 12[/tex]

= [tex]15.34868967[/tex]%

(c)

= [tex][RATE(12\times 5,-PMT(\frac{8.5 \ percent}{12} ,12\times 25,1\times 90 \ percent)+PMT(\frac{8 \ percent}{12} ,12\times 25,1\times 80 \ percent),-1\times 90 \ percent\times (1-2 \ percent)+1\times 80 \ percent],-[FV(\frac{8.5 \ percent}{12} ,12\times 5,PMT(\frac{8.5 \ percent}{12} ,12\times 25,1\times 90 \ percent),1\times 90 \ percent)]+[FV(\frac{8 \ percent}{12} ,12\times 5,PMT(\frac{8 \ percent}{12} ,12\times 25,1\times 80 \ percent),1\times 80 \ percent))\times 12][/tex]= [tex]17.9626[/tex]%

Note: percent = %