Question: Question # 1 (10 Points): A potential borrower wishes to buy a $500,000 home using Loan 1 [mortgage rate: 10.60% , maturity: 30 years, origination

Question # 1 (10 Points): A potential borrower wishes to buy a $500,000 home using Loan 1 [mortgage rate: 10.60%, maturity: 30 years, origination fee: 4 points, prepayment penalty: 2%] with LTV of 80% or using Loan 2 [mortgage rate: 9.60%, maturity: 30 years, origination fee: 3 points, prepayment penalty: 2%] with LTV of 70%.The borrower plans to be in the home for 5 years. Alternative investments of similar risk can provide 19.00% IRR and borrowing from alternative sources (than mortgage) would cost effectively 23.00%. If the borrower has cash for down payment [and origination fee (discount points)] of the larger loan only, which mortgage loan is better for the borrower?

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