Question

John wants to buy a property for $105,000 and wants an 80% LTV loan for $84,000. A fully amortizing loan can be obtained for 30 years at 8 percent interest. A loan origination fee of $3,500 will be necessary to obtain the loan.

c) If John pays off the loan after five years, what is the effective cost of borrowing? Why is it different from the effective cost in part (b)?

d) Assume the lender also imposes a prepayment penalty of 2 percent of the outstanding loan balance if the loan is repaid within eight years of closing. If John repays the loan after five years with the prepayment penalty, what is the effective cost of borrowing?

Answer 1

Answer:

c) The sum remarkable following 5 years (25 years or 300 months remaining)

= 616.36/0.006667*(1-1/1.006667^300)

= 79858.68

In this way, the sum paid for the advance is $616.36 consistently for a very long time and $79858.68 after the fifth year

In this way, The month to month viable rate paid (r) is given by

616.36/r*(1-1/(1+r)^60)+ 79858.68/(1+r)^60 = 80500

Settling r =0.007551

In this way, the Effective expense of obtaining = 0.007551 *12 =0.090615 or 9.06%p.a. APR or month to month aggravated

The rate is higher as the advance is paid before and henceforth the expense is likewise more

d) if prepayment punishment of 2% is paid

In this way, the sum paid for the credit is $616.36 consistently for a very long time and $79858.68 + 2% of $79858.68 =$81455.85 after the fifth year

In this way, The month to month compelling rate paid (r) is given by

616.36/r*(1-1/(1+r)^60)+ 81455.85/(1+r)^60 = 80500

Understanding r =0.007813

Along these lines, Effective expense of obtaining = 0.007813 *12 =0.093751 or 9.38% p.a. APR or month to month intensified