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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?

Business Management, Management Studies

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