A borrower has the choice between two mortgage loans. Both are to be amortized by monthly payments over 10 years. A mortgage broker will charge a fee of $2200 for an $82,200 face value loan at 10.25% compounded semiannually. A trust company will grant an $80,000 loan (with no other fees) at 10.75% compounded semiannually.
Determine which loan has the lower effective annual cost of borrowing if the contractual interest rates are for
a. a 5-year term.
b. the entire 10-year amortization period.

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The Answer of A borrower has the choice between two mortgage loans. Both are to be amortized by monthly payments over 10 years. A mortgage broker will charge a fee of $2200 for an $82,200 face value loan at 10.25% compounded semiannually. A trust company will grant an $80,000 loan (with no other fees) at 10.75% compounded semiannually.
Determine which loan has the lower effective annual cost of borrowing if the contractual interest rates are for
a. a 5-year term.
b. the entire 10-year amortization period.

A Borrower Has the Choice Between Two Mortgage Loans