What would be the real cost of borrowing in the following case? A home equity loan...

What would be the real cost of borrowing in the following case? A home equity loan is advertised at 5% compounded annually, however, there is a legal fee of $520 and appraisal fee of $300 to set up the house as collateral. If Jessie needs to borrow $35 000 for one year, at which time will be able to repay the full amount, what is the effective rate of borrowing the $35 000 for the year?

Solutions

Expert Solution

We are not given whether fees is included in the loan

Case 1: Assuming the fees is not included in the loan
=(35000*(1+5%))/(35000-520-300)-1
=7.519%

Case 2: Assuming the fees is included in the loan
=(35000+520+300)*(1+5%)/(35000)-1
=7.460%

jeff jeffy answered 1 year ago

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