Problem:
A borrower can obtain an 80 percent loan to value mortgage at a rate of 4.75% for a term of 30 years. Alternatively, he/she could obtain a 90 percent loan to value mortgage on the same property purchase at a rate of 5.75% and an additional one point added to the closing costs. The borrower plans to keep the property for the long term, possibly for the entire 30 years of the mortgage. If the purchase price of the property (home) is $200,000,
Required:
Question: What is the incremental cost of borrowing the additional funds, if a 90% loan to value is selected? What is the incremental cost of borrowing the additional funds? Show all of your work in your analysis.
Please explain in detail and also provide full description.