Question

An investor has $70,000 to invest in a $290,000 property. He / she can obtain either a $230,000 loan at 8.5% for 20 years (option A) or a $180,000 loan at 9% for 20 years and a second mortgage for $40,000 at 11% for 15 years. Both loans require monthly payments and are fully amortizing.

Based on the analysis what option should the investor choose, assuming ownership for the full loan term?

		option A
		option B
		explore other options
		none of the above

Answer 1

The correct answer is Option B

If the investor exercises option A he will have to pay the principle amount of $230,000 plus an interest of $249,038 over 20 years which sums to be $4,79,038

If the investor exercises option B he will have to pay the principle amount of $180,000 + $208,682 (interest) = $388,682 and $40,000 + $41,835 (interest) = $81,835. Total amount to be paid in option B is $388,682 + $81,835 = $470,517.

If option A is exercised an extra amount of $8,521 is to be paid.

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