An investor has $70,000 to invest in a $310,000 property. He can obtain either Alternative t A $240,000 loan at 9.6 percent for 20 years or Alternative 2. A $190,000 loan at 9 percent for 20 years and a second mortgage for $50,000 at 13 percent for 20 years. All loans require monthly payments and are fully amortizing Required: a. Which alternative should the borrower choose, assuming he will own the property for the full loan term? b. Which alternative should the borrower choose if the borrower plans to own the property only five years? c1. Which alternative should the borrower choose, assuming he will own the property for the full loan term and the second mortgage has a 10-year term? c2. Which alternative should the borrower choose, assuming that the borrower plans to own the property only for five years and the second mortgage has a 10-year term?

An investor has $70,000 to invest in a $310,000 property. He can obtain either Alternative t A $240,000 loan at 9.6 percent for 20 years or Alternative 2. A $190,000 loan at 9 percent for 20 years and a second mortgage for $50,000 at 13 percent for 20 years. All loans require monthly payments and are fully amortizing Required: a. Which alternative should the borrower choose, assuming he will own the property for the full loan term? b. Which alternative should the borrower choose if the borrower plans to own the property only five years? c1. Which alternative should the borrower choose, assuming he will own the property for the full loan term and the second mortgage has a 10-year term? c2. Which alternative should the borrower choose, assuming that the borrower plans to own the property only for five years and the second mortgage has a 10-year term?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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2. An investor has $60,000 to invest in a $280,000 property. He can obtain either a $220,000 loan at 9.5 percent for 20 years or a $180,000 loan at 9 percent for 20 years and a second mortgage for $40,000 at 13 percent for 20 years. All loans require monthly payments and are fully amortizing. a. Which alternative should the borrower choose, assuming he will own the property for the full loan term? b. Would your answer change if the borrower plans to own the property only five years? Question 3
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A borrower can obtain an 80 percent loan with an 8 percent interest rate and monthly payments. The loan is to be fully amortized over 25 years. Alternatively, he could obtain a 90 percent loan at an 8.5 percent rate with the same loan term. The borrower plans to own the property for the entire loan term. a. What is the incremental cost of borrowing the additional funds? (Hint: The dollar amount of the loan does not affect the answer.) b. How would your answer change if two points were charged on the 90 percent loan? c. Would your answer to part (b) change if the borrower planned to own the property for only five years?
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