A house price of $100,000 can be financed with twoloans below with monthly payments. The totalorigination cost associated with these two loans is$2,000.1st loanOO2nd loan4.28%5.28%6.28%$7.28%$LoanAmount80,000Term (years)3010,000Alternatively, the borrower can borrow one loan in theamount of $90,000 with origination cost of $1,500.What should the interest rate be on the $90,000, 30years loan with monthly payments so that theborrower will be indifferent between these twoalternatives?30InterestRate5%7%

1. Two-Loan Option: - $80,000 first loan at 5% for 30 years. - Second loan: $10,000 for 30 years…

A house price of $100,000 can be financed with two loans below with monthly payments. The total origination cost associated with these two loans is $2,000. 1st loan 2nd loan $ Loan Amount 80,000 10,000 Term (years) 30 30 Interest Rate 5% 7%

A house price of $100,000 can be financed with two loans below with monthly payments. The total origination cost associated with these two loans is $2,000. 1st loan 2nd loan $ Loan Amount 80,000 10,000 Term (years) 30 30 Interest Rate 5% 7%

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter7: Using Consumer Loans

Section: Chapter Questions

Problem 9FPE: Calculating and comparing add-on and simple interest loans. Eli Nelson is borrowing 10,000 for five...

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Question

A house price of $100,000 can be financed with two
loans below with monthly payments. The total
origination cost associated with these two loans is
$2,000.
1st loan
OO
2nd loan
4.28%
5.28%
6.28%
$
7.28%
$
Loan
Amount
80,000
Term (years)
30
10,000
Alternatively, the borrower can borrow one loan in the
amount of $90,000 with origination cost of $1,500.
What should the interest rate be on the $90,000, 30
years loan with monthly payments so that the
borrower will be indifferent between these two
alternatives?
30
Interest
Rate
5%
7%

Expert Solution

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Step 1: Given information

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Step 2: Determine the Monthly Payments for the Two-Loan Option

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Step 3: Determine the Single Loan's Equivalent Interest Rate.

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Step 4: Calculate the Equivalent Interest Rate for the Single Loan

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