1. The actual prepayment penalty under the terms of the apartment building owner’s mortgage is 2% of the balance of the loan. If the owner goes ahead with the refinancing, what was the effective interest rate on the loan over the original ten years?
2. Frank wants to purchase a home for $200,000. He doesn’t have much cash for a down payment, so he is considering getting a 95% LTV (Loan to Value) 30-year mortgage at a rate of 8%. The contract rate on an 80% LTV mortgage would be 7%. What would the incremental cost of financing be for the additional $30,000?
a. Frank’s girlfriend tells him he’s nuts and he should just get the 80% LTV loan and then get a home equity loan at 10%. Is she correct? What would his effective interest rate be over 30 years?