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A loan officer presents two options: 20-year FRM of $1,200,000 at an interest rate of 8.875%...

A loan officer presents two options:

  1. 20-year FRM of $1,200,000 at an interest rate of 8.875% annually with a brokerage fee of $15,500
  2. 20-year FRM of $1,200,000 loan at an interest rate of 7.875% annually with a brokerage fee of $15,500 and 1 point in upfront fees.

Both loans require monthly payments, and your firm anticipates paying off the loan at maturity.

a)Find the effective cost of borrowing (ECB) for each loan to determine the best option. (20 points)

ECB (%): Loan 1
ECB (%): Loan 2

b)Which option is better (i.e., less costly)? (10 points)

  • Loan 1
  • Loan 2

(Please show all work and calculations)

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