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A homebuyer intends to purchase a $300,000 home. The two financing options available to the buyer...

A homebuyer intends to purchase a $300,000 home. The two financing options available to the buyer are: 1) he can obtain 80% loan at a 4.25% interest rate with monthly payments amortizedover 30 years and total closing costs of 2.5% of the new loan.

What is the APR for option 1?

2) He can obtain 95% FHA loan at a rate of 6.75% with monthly payments amortized over 30 years and total closing costs of 5.5% of the new loan.

What is the APR for option 2?

Solutions

Expert Solution

1.

Value of home = $300,000

Value of loan = $300,000 × 80%

= $240,000

Value of loan is $240,000.

Closing cost = $240,000 × 2.50%

= 6,000.

Total amont need to borrow = $240,000 + $6,000

= $146,000.

Monthly payment on loan is calculated in excel and screeen shot provided below:

Monthly payment is $1,210.17.

Effectively loan was $240,000 and pays $1,210.17 month. So effective annual rate is calculated in excel and screen shot provided below:

Effective annual rate is 4.46%.

b.

Value of home = $300,000

Value of loan = $300,000 × 95%

= $285,000

Value of loan is $285,000.

Closing cost = $285,000 × 5.50%

= 15,675

Total amont need to borrow = $285,000 + $15,675

= $300,675.

Monthly payment on loan is calculated in excel and screeen shot provided below:

Monthly payment is $1,950.17

Effectively loan was $285,000 and pays $1,950.17 month. So effective annual rate is calculated in excel and screen shot provided below:

Effective annual rate is 7.28%.

jeff jeffy answered 2 years ago
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