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    Purchase of house: evaluate two financing options

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    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.

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    Solution Preview

    Look at the attached spreadsheet.

    I have attached amortization ...

    Solution Summary

    The Excel worksheet makes the calculations for the two possible loans, and then the narrative concludes which will be preference in the circumstances listed in the problem.