A borrower is purchasing a property for $180,000 and can choose between two possible loan alternatives.The first is a 90% loan for 25 years at 9% interest and 1 point and the second is a 95% loan for 25 years at 9.25% interest and 1 point.Assuming the loan will be held to maturity,what is the incremental cost of borrowing the extra money?
A)13.66%
B)13.50%
C)14.34%
D)12.01%

Question

Quizplus · Accepted Answer

The incremental cost of borrowing the extra money is calculated by comparing the total costs of both loans over their entire term, including interest payments and points. The first loan is for 90% of $180,000, which is $162,000, and the second loan is for 95% of $180,000, which is $171,000. The difference in the loan amounts is $9,000. The interest rates are 9% and 9.25% respectively, and both have 1 point (1% of the loan amount) as an upfront fee. By calculating the total cost of each loan over 25 years and then finding the difference in these costs, divided by the extra amount borrowed ($9,000), we can find the incremental cost percentage. The correct calculation shows that the incremental cost of borrowing the extra $9,000 under the terms given is 13.66%.

A Borrower Is Purchasing a Property for $180,000 and Can