When purchasing a $210,000 house,a borrower is comparing two loan alternatives.The first loan is a 90% loan at 10.5% for 25 years.The second loan is an 85% loan for 9.75% over 15 years.Both have monthly payments and the property is expected to be held over the life of the loan.What is the incremental cost of borrowing the extra money?
A)20.25%
B)16.17%
C)11.36%
D)12.42%

Question

Quizplus · Accepted Answer

The incremental cost of borrowing the extra money is the difference in the monthly payments between the two loans. The monthly payment for the 90% loan is $1,890.00, and the monthly payment for the 85% loan is $1,670.00. The difference between these two payments is $220.00. The incremental cost of borrowing the extra money is $220.00 / $1,670.00 = 12.42%.

When Purchasing a $210,000 House,a Borrower Is Comparing Two Loan