Question

What is the effective cost of a $300,000 fixed rate mortgage loan at 5.0% for 30 years if the lender charges two points? Assume the loan is held until maturity.

Select one:

a. 5.33%

b. 5.0%

c. 5.25%

d. 5.18%

Answer 1

Here, Original loan amount = $ 3,00,000

Interest per annum = 5%

Duration = 30 years

Lender is charging 2 points which means " 1 point = 1% " therefore 2 points = 2% of principal amount

Therefore 2 points means = $ 6000( which will be added to the principal amount)

Effective cost = interest per annum divided by principal amount

that is, $306000 * 5/100 = $ 15,300 per year interest

so, $ 15,300/ $ 306000 = .05

therefore the answer is b. 5.0%