Question: Incremental Borrowing Cost A borrower can obtain an 80 percent loan with 4 percent interest rate and monthly payments. The fully amortizing loan has a

Incremental Borrowing Cost

A borrower can obtain an 80 percent loan with 4 percent interest rate and monthly payments. The fully amortizing loan has a 20-year term. Alternatively, the borrower could obtain a 90 percent loan at a 4.75 percent rate with the same loan term. The borrower plans to own the property for the entire loan term. Assume the purchase price is $400,000.

a. What is incremental cost of borrowing the additional funds?

b. How would your answer change if one point was charged on the 90 percent loan and the loan included additional up-front fees equal to $3,200?

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