Problem:
You are contemplating the purchase of a house. You are offered two financing choices:
A. Borrow $500,000 on a 30-year term at 9% p.a. with equal monthly payments in arrears, or
B. Borrow the same amount interest-only for 10-years at 8.5% with an up-front fee of $10,000, the full amount of the principal to be repaid at the end of the term.
Either loan can be prepaid without penalty. You only expect to stay in the house for 5 years. If your personal discount rate is 10%, which is the better deal? Ignore taxes.