An investor has $60,000 to invest in a $280,000 property. He can obtain either a $220,000 loan at 9.5 percent for 20 years or a $180,000 loan at 9 percent for 20 years and a second mortgage for $40,000 at 13 percent for 20 years. All loans require monthly payments and are fully amortizing.
a. Which alternative should the borrower choose, assuming he will own the property for the full loan term?
b. Would your answer change if the borrower plans to own the property only five years?
c. Would your answers to (a) and (b) change if the second mortgage had a 10-year term?