1. A borrower is purchasing a property for $180,000 and can choose between two possible loan alternatives. Loan A is a 90% loan for 25 years at 9% interest and 1 point and Loan B is a 95% loan for 25 years at 9.25% interest and 1 point.
a. Assume the loans will be held to maturity, what is the incremental cost of borrowing the extra money.
b. Assume that the loans will be repaid in 5 years. What is the incremental cost of borrowing the extra money?
c. Rework parts (a) and (b) assuming the lender is charging 2 points on Loan A and 1 point on Loan B. What is the incremental cost of borrowing?
d. Assume Loan B now has a maturity of 20 years. What is the incremental cost of borrowing? Both loans held to maturity with no points charged
2. Mr. Tramp made a mortgage 5 years ago for $85,000 at 8.25% interest and a 15 year term. Rates have now risen to 10% for an equivalent loan. Mr. Tramp’s lender is willing to discount the loan by $2,000 if he will prepay the loan. What rate of return would Mr. Tramp receive by prepaying the loan?
3. A loan was made 10 years ago for $140,000 at 10.5% for a 30 year term. Rates are currently 9.25%. What is the market value of the loan?