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"A borrower is purchasing a property for $180,000 and can choose between two possible loan alternatives....

"A borrower is purchasing a property for $180,000 and can choose between two possible loan alternatives. The first is a 90% loan for 25 years at 9% interest and 1 point and the second is a 95% loan for 25 years at 9.25% interest and 1 point. Assuming the loan will be repaid in 5 years, what is the incremental cost of borrowing the extra money?"

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Answer #1
Option A Option B Difference
Loan to Value Ratio 90% 95%
Loan Amount 162000 171000 9000
Time 25 25
Annual Interest Rate 9% 9.25%
Monthly Interest Rate 0.75% 0.77%
Constant Monthly Installment ₹ 1,359.50 ₹ 1,464.41 104.914842
(Using PMT Function) (Using PMT Function)
Incremental Cost of borrowing
Credit Facility Amount Monthly Payment
Option A 171000 ₹ 1,464.41
Option B 162000 ₹ 1,359.50
Difference 9000 ₹ 104.91
Monthly Incremental Cost of Borrowing 1.125% rate(periods, Difference in monthly payment, -Difference in Credit Facility Amount)
Annual Incremental Cost of Borrowing 13.50%

Hence the annual incremental cost of borrowing is 13.50%

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