Problem:
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.
Required:
What is the incremental cost of borrowing the extra money?
- 20.25%
- 16.17%
- 11.36%
- 12.42%
Note: Please show how to work it out.