Note 1: Unless otherwise indicated, all cash flows given in the problems represent after-tax cash flows in current dollars. Note 2: Unless otherwise noted, all interest rates presented in this set of problems assume annual compounding.

1. You want to buy an $85,000 house and have $17,000 cash available for a down payment. You are considering the following two financing options: _ Option 1: Get a new standard mortgage with 10% (tpa) monthly compound interest at a term of 30 years. Option 2: Accept the seller's old mortgage which has an interest rate of 8.5% (tpa) compounded monthly, and a term of 25 years from an original term of 30, a remaining balance of $35,394 and payments of $285 per month. You can obtain a second mortgage for the unpaid balance, $32,606, from your credit union at 12% (tpa) compounded monthly, with a 10-year payoff period. a) What is the effective interest rate for option 2? b) Calculate the monthly payments for each option over the life of the mortgage. c) Calculate the total interest payment for each option. d) Which of the homeowners' interest rates (the time value of the homeowners' money) makes the two options equivalent?