Question

How do you compute effective annual rate incorporating closing costs? Please give an example

Answer 1

If you choose to finance your closing costs, the monthly loan payments will be higher than if you had paid the closing costs out-of-pocket. In order to help borrowers compare loans, a standard calculation called annual effective rates (APR) is used which takes into account the closing costs.Consider the exampe below :

Suppose a mortagage of 1 million dollar for 30 years at 5%. Consider origination fee of 1% and all other closing cost of of USD 2150.

The monthy payment will increase from 5368 to 5433, therefore the effectve annual rate will also increase.