After-tax cost of borrowing through second mortgage

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Reference no: EM132062936

Bella Wans is interested in buying a new motorcycle. She has decided to borrow the money to pay the $25,000 purchase price of the bike. She is in the 30% federal income tax bracket. She can either borrow the money at an interest rate of 7% from the motorcycle dealer, or she could take out a second mortgage on her home. That mortgage would come with an interest rate of 9%. Interest payments on the mortgage would be tax deductible for Bella, but interest payments on the loan from the motorcycle dealer could not be deducted on Bella's federal tax return.

a. Calculate the after-tax cost of borrowing from the motorcycle dealership.

b. Calculate the after-tax cost of borrowing through a second mortgage on Bella's home.

c. Which source of borrowing is less costly for Bella (Select the best answer below.)

A. Both loans have the same rate of 30%, so Bella should choose the loan she likes best.

B. Bella should borrow by taking the second mortgagesecond mortgage.

C. Bella should borrow by taking the dealership loandealership loan.

D. Both loans have the same rate of 30%, so Bella should not take either loan.

D. Is there any other consideration that Bella ought to think about when deciding which loan to take out to pay for the? motorcycle (Select the best answer? below.)

A. Using the second home mortgage does put Bella at risk of losing her motorcycle if she is unable to make the mortgage payments.

B. Using the second home mortgage does put Bella at risk of losing her home if she is unable to make the mortgage payments.

C. Using the motorcycle dealership loan does put Bella at risk of losing her home if she is unable to make the loan payments.

D. Using the motorcycle dealership loan does put Bella at risk of losing her home and motorcycle if she is unable to make the loan payments.

Reference no: EM132062936

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