Need help figuring out problem #40, #42, and #45 in the attached document. I have the answers for the problems, but need to see how they are worked out.

FIN 142 - Real Estate Finance Problem Set 2 1. Suppose that you are considering an adjustable rate mortgage loan with the following characteristics: Loan amount: $300,000 Term: 20 years Index: one year T-Bill Margin: 2.5% Periodic cap: 2% Lifetime cap: 5% Negative amortization: not allowed Financing costs: $3,500 in origination fees and 1 discount point If the Treasury bill yield is 3.5% at the outset and then moves to 4.5% at the beginning of the second year and to 8.5% at the beginning of the third year and you pay off the loan at the end of the third year, what is your effective borrowing cost? 2. A developer is offering a buy down loan whereby the interest rate will be bought down during the first 2 years of the mortgage. The rate for year 1 will be 6%; year 2, 7%; and years 3 through 30, the market rate of 8%. A buyer is considering purchasing one of the developer's new homes, which is priced at $300,000. The borrower expects to put down $60,000 and pay a 1% origination fee and 1 discount point at closing. a) Determine the borrower's before-tax effective borrowing cost assuming that the borrower will hold the mortgage for 8 years. b) By what amount could the developer increase the selling price of the house? Assume that the developer's required rate of return is 12%. 3. A lender offers the following loans: Shared Appreciation Mort. Original price $300,000 Mortgage amount $234,000 Interest rate 8% Maturity 25 yrs. Fixed Rate Mort. $300,000 $234,000 9.5% 25 yrs. The shared appreciation mortgage calls for the lender to receive 33% of the property's appreciation after a 5year holding period. a) If the borrower expects housing prices to increase at a rate of 3.5% per year, what would the effective cost of the SAM be? b) How would a borrower choose between the SAM and FRM? 4. Ms. Fabian has a choice in borrowing money for a new house valued at $270,000. She can obtain an 80% loan at 6% for 30 years with a 1% origination fee and two discount points, or she can obtain an 85% loan at 6% for 30 years with a 1% origination fee, two discount points and an estimated annual insurance premium of 0.52% of the loan amount. For simplicity assume the monthly mortgage insurance premiums are computed using the original loan amount instead of the loan balance. At closing Ms. Fabian has to prepay 14 months of mortgage insurance premiums. Ms. Fabian intends to sell the house in 5 years. At that time, unless the Private Mortgage Insurance has been previously cancelled, the unearned portion of the prepaid mortgage insurance premiums will be refunded to Ms. Fabian. Which alternative should Ms. Fabian choose if her required rate of return is 8%? Explain your answer. 5. Mr. Friedman owns a house, which he purchased five years ago. He had financed the purchased with $450,000 mortgage with an interest rate of 9%, a 30 year term, and a 1.5% origination fee. Today, a new mortgage can be obtained at 6% for 25 years with a 1% origination fee and 2.5 discount points. If Mr. Friedman pays off the existing loan within 8 years of origination, a 3% prepayment penalty will be charged on the outstanding loan balance. He intends to sell the house five years from now. To finance the initial Page 1 of 13 investment required to refinance the house Mr. Friedman can obtain a personal loan at 8% for 60 months, or he can use his own capital. a) Should he refinance if his opportunity cost of capital is 8%? Explain. b) Which source of funds should Mr. Friedman use if he decides to refinance the house? Explain. 6. David is considering an adjustable rate mortgage loan with the following characteristics: Loan amount: $250,000 Term: 30 years Index: one year T-Bill Margin: 2% Periodic cap: 2% Lifetime cap: none Negative amortization: not allowed Financing costs: 1discount point and $5,500 in origination fees. The Treasury bill yield is 6% at the outset and is expected it to increase to 8% at the beginning of the second year and to 13% at the beginning of the third year. If David pays off the loan at the end of the third year, what is the ARM's effective borrowing cost? 7. A homebuilder is offering a buy down loan whereby the interest rate will be bought down during the first 3 years of the mortgage. The rate for year 1 will be 5%; year 2, 6%; year 3, 7%; and years 4 through 30, the market rate of 8%. A buyer is considering purchasing one of the developer's new homes, which is priced at $250,000. The borrower expects to put down $50,000 and pay a 1% origination fee and 1 discount point at closing. a) Determine the borrower's before-tax effective borrowing cost assuming that the borrower will hold the mortgage for 6 years. b) By what amount could the developer increase the selling price of the house? 8. Jane is purchasing a $150,000 home with a $140,000 shared appreciation mortgage at 10% interest, amortized over 20 years. The lender's share of the sales proceeds is 40% as set forth in the mortgage agreement. Determine the cash flows and the cost of the SAM to Jane, assuming an appreciation rate on the property of 3% per year and a 5 year holding period. 9. Mr. Watt has a choice in borrowing money for a new house valued at $156,960. He can obtain an 80% conventional loan at 6% for 30 years, or he can obtain a 95% conventional loan at 6% for 30 years. In both cases financing costs will be 3.5% of the loan amount. In addition, to obtain the 95% loan Mr. Watt has to prepay 14 months of mortgage insurance premiums plus an estimated monthly premium of $117.72. He intends to sell the house in 5 years. At that time, unless the PMI has been previously cancelled, the unearned portion of the prepaid mortgage insurance premiums will be refunded to Mr. Watt. Which loan should Mr. Watt choose if his opportunity cost of capital is 8%? Explain your answer. 10. Ms. Smith owns a house, which she purchased five years ago. The original mortgage was for $150,000 with an interest rate of 8% and a term of 25 years. She also paid 2 points. Interest rates have now fallen to 6% and a new mortgage can be obtained for an origination fee of 1% of the new loan amount. The term is 20 years. If the existing loan is paid off within 10 years of origination, a prepayment penalty equal to 1.5% of the outstanding balance will be charged. a) Should Ms. Smith refinance his mortgage if she plans to sell the house 5 years from now and her required rate of return is 8%? Explain. b) How many months Ms. Smith must hold the new mortgage to recover her initial investment? 11. An interest only ARM is made for $200,000 for 30 years. The start rate is 5 percent and the borrower will make monthly interest only payments for 3 years. Payments thereafter must be sufficient to fully amortize the loan at maturity. Page 2 of 13 a) If the borrower makes interest only payments for 3 years, what will payments be? b) Assume that at the end of year 3, the reset rate is 6 percent. The borrower must now make payments so as to fully amortize the loan. What will payments be? 12. You are considering the purchase of a property today for $300,000. You plan to finance it with an 80 percent loan. The appreciation rate on the property value is expected to be 4 percent annually for the next three years. a) Approximate the expected annual average rate of appreciation on home equity for the next 3 years. b) What if you now think that a $300,000 purchase price may be somewhat high and that if you pay this price, the expected appreciation rates in your house price will be as follows: year 1=0%, year 2=2%, and year 3=3%. How will your answer to part (a) change? 13. A reverse annuity mortgage is made with a balance not to exceed $300,000 on a property now valued at $700,000. The loan calls for monthly payments to be made to the borrower for 120 months at an interest rate of 11 percent. a) What will the monthly payments be? b) What will be the RAM balance at the end of year 3? c) Assume that the borrower must have monthly draws of $2,000 for the first 50 months of the loan. Remaining draws from months 51 to 120 must be determined so that the $300,000 maximum is not exceeded in month 120. What will draws by the borrower be during months 51 to 120? 14. A basic ARM is made for $200,000 at an initial rate of 6 percent for 30 years with an annual reset date. The borrower believes that the interest rate at the beginning of year (BOY) 2 will increase to 7 percent. a) Assuming that a fully amortizing loan is made, what will monthly payments be during year 1? b) Based on part (a) what will be the loan balance be at the end of (EOY) 1? c) Given that the interest rate is expected to be 7 percent at the beginning of year 2, what will monthly payments be during year 2? d) What will be the loan balance at the EOY 2? 15. 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 doesn't affect the answer.) b) How would your answer change is two points were charged in the 90 percent loan? c) Would your answer to part (b) change if the borrower planned to own the property for only five years? 16. 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? c) Would your answers to parts (a) and (b) change if the second mortgage had a 10-year term? 17. An investor obtained a fully amortizing mortgage 5 years ago for $95,000 at 11 percent for 30 years. Mortgage rates have dropped, so that a fully amortizing 25-year loan can now be obtained at 10 percent. There is no prepayment penalty on the mortgage balance of the original loan, but three points will be charged on the new loan and other closing costs will be $2,000. All payments are monthly. a) Should the borrower refinance if he plans to own the property for the remaining loan term? Assume that the investor borrows only an amount equal to the outstanding balance of the loan. b) Would your answer to part (a) change if he planned to own the property for o Page 3 of 13 18. A builder is offering $100,000 loans for his properties at 9 percent for 25 years. Monthly payments are based on current market rates of 9.5 percent and are to be fully amortized over 25 years. The property would normally sell for $110,000 without any special financing. a) At what price should the builder sell the properties to earn, in effect, the market rate of interest on the loan? Assume the buyer would have the loan for the entire 25 year term. b) How would your answer to part (a) change if the property is resold after 10 years and the loan repaid? 19. A property is available for sale that could normally be financed with a fully-amortizing $80,000 loan at a 10 percent rate with monthly payments over a 25-year term. Payments would be $726.96 per month. The builder is offering buyers a mortgage that reduces the payments by 50 percent for the first year and 25 percent for the second year. After the second year, regular monthly payments of $726.96 would be made for the remainder of the loan term. a) How much would you expect the builder to have to give the bank to buy down the payments as indicated? b) Would you recommend the property to be purchased if it was selling for $5,000 more than similar properties that do not have the buydown available? 20. You are considering an option to purchase or rent a single residential property. You can rent it for $1,200 per month and the owner would be responsible for maintenance, property insurance, and property taxes. Alternatively, you can purchase this property for $200,000 and finance it with an 80 percent LTV, 30 year loan at 6 percent interest. The loan can be prepaid at any time with no penalty. You have done research in the market area and found that (1) properties have historically appreciated at an annual rate of 3 percent, and rents on similar properties have also increased at 3 percent annually; (2) maintenance and insurance are currently $1,500 each per year and they have been increasing at a rate of 3 percent per year; (3) you are in a 26 percent marginal tax rate and plan to occupy the property as your property as your personal residence for at least four years and the capital gains exclusion would also apply when you sell the property; (4) selling costs would be 7 percent in the year of sale; (5) property taxes have generally been about 2 percent of property value each year. Based on this information you must decide: a) If you choose to rent, and invest the $40,000 down payment in an investment comparable to buying a house, you can expect to earn 10% after taxes on your equity. Should you buy the property or rent it for a four-year period of ownership? b) What if your expected period of ownership was to change to five years? Would owning or renting be better if you wanted to earn a 10% IRR after taxes? c) Approximately what level of rents would make you indifferent between owning and renting for a fouryear period? Hint: You can use the \"Ch7 Rent vs Buy\" sheet in the Excel templates file to solve this problem. 21. A family with a gross monthly income of $8,500 is considering a $250,000, 30 year, 6.25% fix rate conventional mortgage to buy a $300,000 house. Move-in costs include the down payment, a $1,600 loan origination fee, 1 discount point, $3,500 in third party fees, 14 months of mortgage insurance premium, 2 months of property taxes, and 14 months of hazard insurance. The family estimates annual real estate taxes as 1.2%, annual hazard insurance as 0.4%, and annual maintenance as 1% of the purchase price. The annual private mortgage insurance premium is estimated as 1% of the loan amount. The household has monthly installment payments of $500 and is in the 35% marginal tax bracket. The lender requires that the housing expense ratio be no higher than 28%, and the monthly payment ratio no higher than 36%. a) Can this family qualify for the loan? b) What is the total amount of the move-in costs? 22. A family with a gross monthly income of $11,000 is considering a $357,000, 30 year, 7% mortgage to buy a house priced at $375,800. The annual private mortgage insurance premium is estimated as 0.78% of the loan amount. Move-in costs include the down payment, a 1% loan origination fee, 1 discount point, $5,400 in third party fees, 14 months of mortgage insurance premium, 6 months of property taxes, and 14 months of hazard insurance. The family estimates annual real estate taxes as 1.25%, annual hazard insurance as 0.4%, and annual maintenance as 1% of the purchase price. The household has a monthly installment Page 4 of 13 payment of $1,000 and is in the 28% marginal tax bracket. Maximum housing expense ratio is 28%, while maximum total monthly payment ratio is 36%. a) Can this family qualify for the loan? b) What is the total amount of the move-in costs? 23. Suppose you borrow $50,000 at 12 percent on a 30-year loan payable monthly. How much will you still owe after year 20? a. $16,667 b. $20,000 c. $30,847 d. $25,847 e. $35,847 24. If market rates are 12 percent, what is the price of a $1 million, 12 percent mortgage loan for 30 years at which the effective yield equals the promised yield? a. $1 million b. $1.2 million c. $1,117,014 d. $1,003,619 e. none of the above 25. What is the monthly payment on an $80,000 mortgage at a 10-percent fixed-rate for 30 years? a. $877.57 b. $702.06 c. $113.95 d. $666.67 e. $757.83 26. The monthly mortgage payment on your house is $821.69. It is a 30 year mortgage at 6.5% compounded monthly. How much did you borrow? a. $ 85,000 b. $100,000 c. $115,000 d. $130,000 e. $140,000 27. Your local S&L provides you with the following information concerning a possible single payment loan. You pay 2 points and the interest rate you are charged is 8%. If you borrow $50,000 for one year on these terms, at what rate are you actually borrowing? a. 8.20% b. 8.71% c. 9.20% d. 10.20% e. 11.48% Use the following to answer the next 4 questions: A borrower is approved for a $80,000 mortgage loan at 12% interest with monthly payments over 30 years. The borrower is required to pay 3.5 points. Page 5 of 13 28. Assume that monthly payments begin in one month. What will each payment be? a $822.89 b. $800.00 c. $794.09 d. $842.58 e. $876.85 29. What will the outstanding balance of the loan be after five years assuming you make the first 60 payments exactly on time? a $75,396 b. $75,957 c. $78,131 d. $80,000 e. $82,576 30. Assume the borrower repays the loan after 5 years. What is the effective borrowing cost (EBC) on this loan? a 12.96% b. 12.00% c. 12.48% d. 12.76% e. 13.05% 31. Assume the loan is paid after five years and that the terms of the loan call for a prepayment penalty of 3% of the outstanding loan balance. What is the amount owed to the lender? a $77,658 b. $78,236 c. $80,474 d. $82,400 e. $85,673 Use the following to answer the next 5 questions: You and your spouse have found your dream home. The selling price is $220,000; you will put $50,000 down and obtain a 30-year fixed-rate mortgage at 7.5%. 32. Assume that monthly payments begin in one month. What will each payment be? a $ 901.52 b. $1,188.66 c. $1,359.74 d. $1,563.01 e. $1,722.80 33. How much interest will you pay (in dollars) over the lifetime of the loan? (Assume you make each of the required 360 payments on time.) a. $235,101 b. $245,583 c. $257,919 d. $290,457 e. $370,457 Page 6 of 13 34. What will the outstanding balance of the loan be after five years assuming you make the first 60 payments exactly on time? a. $ 59,321 b. $128,225 c. $147,551 d. $160,850 e. $170,000 35. Although you will get a 30-year mortgage, you plan to prepay the loan by making an additional payment each month along with your regular payment. How much extra must you pay each month if you wish to pay off the loan in 20 years? a. $ 90.56 b. $154.88 c. $180.85 d. $203.28 e. $226.86 36. Your banker suggests that, rather than obtaining a 30-year mortgage and paying it off early, you should simply obtain a 15-year loan for the same amount. The rate on this loan is 6.75%. By how much will your monthly payment increase/decrease for the 15-year loan than the regular payment on the 30-year loan? a. decrease; $211.57 b. decrease; $154.72 c. increase; $ 89.26 d. increase; $494.59 e. increase; $315.69 Use the following to answer the next 6 questions: Tom wants to buy a house priced at $500,000. He plans to put 20% down and a mortgage banker will lend him the remainder at a 6% fixed rate for 30 years, with monthly payments to begin in one month. Tom is required to pay 2 points. 37. How much will his monthly payments be? a. $2,350.24 b. $2,398.20 c. $2,937.80 d. $2,997.75 e. $3,075.75 38. Tom has monthly income of $11,000. Tom estimates annual real estate taxes as 1.25%, annual hazard insurance as 0.4%, and annual maintenance as 1% of the purchase price. At closing, Tom will have to fund 6 months of property taxes, and 14 months of hazard insurance. What is the housing expense ratio? a. 0.28 b. 0.32 c. 0.34 d. 0.37 e. 0.42 Page 7 of 13 39. Based on the information provided above what is the monthly payment ratio if Tom has an outstanding installment debt with monthly payments of $750? a. 0.31 b. 0.35 c. 0.39 d. 0.44 e. 0.49 40. Based on the information provided above what is the amount of the move-in costs? a. $100,000 b. $108,000 c. $113,458 d. $118,458 e. $132,086 41. Assume Tom repays the loan after 8 years. What is the effective borrowing cost (EBC) on this loan? a. 6.19% b. 6.34% c. 6.47% d. 6.70% 42. If the lender requires that the housing expense ratio be at most 25%, what is the maximum monthly mortgage payment the borrower would qualify for? a. $2,750.00 b. $520.83 c. $166.67 d. $2,358.59 e. $2,062.50 43. If the lender requires that the housing expense ratio be at most 25%, what is the maximum loan amount the borrower would qualify for? a. $344,000 b. $375,000 c. $325,000 d. $500,000 e. $400,000 Use the following to answer the next 5questions: A lender makes a loan of $100,000 at a 6% interest rate for 25 years with monthly payments. The lender will require an origination fee of $1,000 and will also discount the loan by some amount. 44. What will the monthly payments be? a. $593.56 b. $599.55 c. $637.80 d. $644.30 e. $780.65 Page 8 of 13 45. By what amount must the lender discount the loan such that the effective interest rate would be 8%, assuming the mortgage will be sold at par one year after closing? (How many discount points will the lender charge)? a. $743 (0.74 dp) b. $901 (0.9 dp) c. $1,000 (1 dp) d. $1,887 (1.9 dp) e. $2,887 (2.9 dp) 46. Suppose the lender discounts the loan by the amount calculated in question 23. What is the annual percentage rate (APR) on this loan? a. 5.45% b. 6.00% c. 6.11% d. 6.20% e. 6.65% 47. What will the outstanding balance of the loan be after eight years assuming you make the first 96 payments exactly on time? a. $78,832 b. $79,627 c. $82,276 d. $84,707 e. $86,760 48. Assume the borrower repays the loan after 8 years. What is the effective borrowing cost (EBC) on this loan? a. 6.10 b. 6.17 c. 6.33 d. 6.50 e. 6.84 Use the following to answer the next 3 questions: Item Loan 1 Loan 2 Initial Interest Rate ? ? Loan Maturity (years) 20 20 Adjustment Interval 1 no adjust. Points 1 1 Interest Rate Cap None 0 Loan 3 ? 20 1 1 1%/year Loan 4 ? 20 1 1 3%/year 49. If the loans are priced competitively, which loan should have the lowest initial interest rate? a. Loan 1 b. Loan 2 c. Loan 3 d. Loan 4 50. Which loan is a FRM? a. Loan 1 b. Loan 2 c. Loan 3 d. Loan 4 Page 9 of 13 51. With which loan is the lender least exposed to interest rate risk? a. Loan 1 b. Loan 2 c. Loan 3 d. Loan 4 Use the following information to answer the next 2 questions: A borrower is purchasing a property for $180,000 and can choose between two possible loan alternatives. The first is a 90% loan for 25 years at 9% interest and 1 point and the second is a 95% loan for 25 years at 9.25% interest and 1 point. 52. Assuming the loan will be held to maturity, what is the incremental cost of borrowing? a. 13.66% b. 13.50% c. 14.34% d. 12.01% e. 11.65% 53. Assume that the loan will be repaid after 5 years. What is the incremental cost of borrowing? That is, what is the cost of borrowing the additional 5% with loan 2? a. 13.95% b. 13.67% c. 14.42% d. 12.39% e. 11.49% 54. A borrower obtained a loan 7 years ago for $160,000 at 10.25% interest for 30 years. The loan balance is now $151,806.62, and a new loan is available at 9.0% interest for 23 years. Origination fees and closing costs are $4,500 and closing costs are not financed by the lender. What is the expected return from refinancing if the new loan is held to maturity? a. 9.39% b. 10.85% c. 15.32% d. 34.48% e. 38.93% Use the following information to answer the next 4 questions: Tom has a choice in borrowing money for a new house valued at $150,000. He can obtain an 80% LTV loan at 8% for 30 years with a 1% origination fee and one discount point, or he can obtain a 90% LTV loan at 8% for 30 years with a 1% origination fee, two discount points, and an up-front mortgage insurance premium of 0.5% of the loan amount plus an annual premium of 0.3% of the loan amount. Tom intends to sell the house in 8 years. 55. What is the net cash received by the borrower if he takes the 90% loan? a. $130,275 b. $130,950 c. $134,325 d. $138,450 e. None of the above Page 10 of 13 56. What is the incremental monthly payment? a. $110.06 b. $140.06 c. $143.81 d. $158.06 e. None of the above 57. What is incremental loan balance? a. $11,536 b. $12,151 c. $13,653 d. $14,734 e. None of the above 58. What is the marginal cost of the additional funds? a. 14.14% b. 12.60% c. 10.08% d. 9.93% e. None of the above Use the following information to answer the next 5 questions: Alice owns a house, purchased five years ago. The original mortgage was for $240,000 with an interest rate of 8% and a term of 25 years. She paid 2 points. Interest rates have now fallen to 6% and a new mortgage can be obtained with 1 discount point. The new loan's term would be 20 years. If the existing loan is paid off within 8 years of origination, a 1.5% prepayment penalty will be charged. 59. What is the initial investment for refinancing? a. $5,536 b. $7,751 c. $9,966 d. $12,450 e. None of the above 60. What is the incremental monthly payment? a. $226.10 b. $241.97 c. $265.77 d. $287.45 e. None of the above 61. What is incremental loan balance at the end of the 5th year? a. $5,815 b. $2,995 c. $1,115 d. $995 e. None of the above Page 11 of 13 62. What is the NPV of refinancing the mortgage if Alice plans to sell the house 5 years from now and her required rate of return is 8%? a. $7,044 b. $9,259 c. $11,474 d. $13,450 e. None of the above 63. How many months must Alice hold the new mortgage to recover her initial investment? a. 32.5 b. 36.2 c. 52.3 d. 65.3 e. None of the above Use the following information to answer the next 3 questions: John is considering an adjustable rate mortgage loan with the following characteristics: Loan amount: $400,000 Term: 30 years Index: one year T-Bill Margin: 2% Periodic cap: 2% Lifetime cap: none Negative amortization: not allowed Financing costs: 1% origination fee and 2 points. The Treasury bill yield is 4% at the outset and is expected to increase to 6% at the beginning of the second year and to 11% at the beginning of the third year. If John pays off the loan at the end of the third year, what is the ARM's effective borrowing cost? 64. What is the monthly payment during the second year? a. $ 2,398.20 b. $ 2,923.44 c. $3,476.22 d. $4,523.68 e. None of the above 65. What is the loan balance at the end of the third year? a. $388,796 b. $389,268 c. $389,997 d. $392,985 e. None of the above 66. What is the effective borrowing cost? a. 9.62% b. 9.81% c. 9.89% d. 9.03% e. 9.60% Use the following to answer the next 2 questions: Cindy is purchasing a $360,000 home with a $288,000 SAM at 6% interest, amortized over 25 years, with one discount point. The lender's share of the price appreciation is 30% as set forth in the mortgage Page 12 of 13 agreement. Cindy assumes the appreciation rate of the property will be 3.5% per year and the holding period of 5 years. 67. What is the appreciation of the property during the holding period? a. $53,108 b. $63,000 c. $67,567 d. $73,657 e. None of the above 68. What is the effective borrowing cost? a. 7.47% b. 7.39% c. 6.24% d. 6.04% e. None of the above Use the following information to answer the next 2 questions: When purchasing a $210,000 house, a borrower is comparing two loan alternatives. The first loan is a 90% loan at 10.5% for 25 years. The second loan is an 85% loan for 9.75% over 25 years. Both have monthly payments. 69. Assume the loan will be held to maturity, what is the incremental cost of borrowing? a. 20.25% b. 18.95% c. 16.17% d. 12.42% e. 22.05% 70. Assume that the loan will be repaid in 5 years. What is the incremental cost of borrowing? a. 13.95% b. 13.67% c. 14.42% d. 22.71% e. 18.56% Page 13 of 13