1. You plan on purchasing a house using a mortgage that will have an initial balance of $150,000. Your lender offers you three choices: a loan with a contract rate of 6.25% and 2.00 points, a loan with a contract rate of 6.5% and one point, or a loan with a contract rate of 6.85% and no points. If you plan on staying in the house for 10 years, what loan should you take?
2. Today you can get an 80% LTV loan on a $200,000 house at a contract rate of 6.85% with no points. You can get a 90% LTV loan on the same house at a contract rate of 7.25%. Assuming a 30 year mortgage, and that you will hold the loan for that entire 30 year period, what is the incremental cost of financing the marginal 10%? If you planned to prepay the loan after 10 years, what would be the incremental cost of financing the marginal 10%?