Effective borrowing cost, You want to buy a $500,000 house

Effective borrowing cost

Assignment Help Financial Management

Reference no: EM13879300

Effective Borrowing Cost (ROUND INTEREST RATES TO 2 DECIMAL PLACES!)

You want to buy a $500,000 house and you have two options for a mortgage:

The first is a 30 year 4.5% mortgage (monthly compounding) at 80% LTV.

The second is a 30 year 4.0% mortgage (monthly compounding) at 80% LTV. But you must pay upfront costs of 3 points, plus an additional $2,000 in closing costs for this mortgage.

a) What would be the effective borrowing cost on the two loans if you want to hold the mortgages to maturity? Which one do you prefer? (In other words, which one has the lowest effective borrowing cost?)

b) What would be the effective borrowing cost on the two loans if you want to hold the mortgages for 5 years? Which one do you prefer in this situation according to the effective borrowing costs?

Reference no: EM13879300

Questions Cloud

Describe the dividend theories-dividend irrelevance : Describe the dividend theories: dividend irrelevance, dividend preference, tax effect theory, clientele effect, and signaling hypothesis.

Reflecting a risk-free rate : Create SML graph reflecting a risk-free rate of 2% and the market return 7%. Company A with a beta of 0.82 and Company B with a beta of 0.88 needed to be labeled on the graph. Then write down the risk premiums of your companies and assess how risky y..

Constant growth rate-what will share of stock sell for today : Storico Co. just paid a dividend of $1.90 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent divid..

About the current share price : Bayou Okra Farms just paid a dividend of $3.30 on its stock. The growth rate in dividends is expected to be a constant 6 percent per year indefinitely. Investors require a return of 15 percent for the first three years, a return of 13 percent for the..

Effective borrowing cost : You want to buy a $500,000 house and you have two options for a mortgage: What would be the effective borrowing cost on the two loans if you want to hold the mortgages to maturity? Which one do you prefer? (In other words, which one has the lowest ef..

Rapid growth-what is projected dividend for the coming year : Momsen Corp. is experiencing rapid growth. Dividends are expected to grow at 26 percent per year during the next three years, 16 percent over the following year, and then 5 percent per year indefinitely. The required return on this stock is 12 percen..

Public be made aware that insiders are paying lower price : Should insiders (example company owners) of a company be allowed to purchase stock at a lower price that the market price offered? Should the public be made aware that insiders are paying a lower price? How?

Calculate marginal cost of capital : Calculate Ulwind’s MCC (marginal cost of capital) assuming that (1) it wants to maintain its current capital structure and (2) it will have to issue new shares of both preferred and common stock

Find the rate on pure discount loan hedged with a long FRA : Find the rate on a pure discount loan hedged with a long FRA if the loan is for $10 million and matures in 30 days, the FRA is 30-day LIBOR, the fixed rate on the FRA is 4 percent, and LIBOR at the time the loan is taken out is 5 percent.

User Account

All Pages