Question

Given the following information, calculate the Effective Borrowing Cost (EBC). Loan amount: $175,000, Term: 30 years, Interest rate: 7 %, Payment: $1,164.28, Discount points: 1 point, Origination fee: $3,250. Assume the loan is held until the end of year 10.

A. 0.6%

B. 3.8%

C. 7.0%

D. 7.4%

please show how to solve on a financial calculator.

Answer 1

Solution::-

GIVEN : LOAN AMOUNT : $175000 , TERM = 10 YEARS , INTEREST RATE =7% ORIGINATION FEE = $3250

DISCOUNT POINT =1 MEANS $ 1750 TOTAL UPFRONT COST = $5000

ADDING THIS TO THE LOAN AMOUNT = $175000 +$5000 =$180000

NOW APPLYING 7 % TO THIS LOAN AMOUNT OF $180000 = 7% * 180000 = $12,600

Now when we divide this $12600 by 175000 , we get the effective rate of borrowing which is 7.4 % p.a.

Also image can be attached to clear the doubts:-