Assume the following for a fully amortizing adjustable mortgage loan tied to the

Question

Assume the following for a fully amortizing adjustable mortgage loan tied to the one-year Treasury rate, with 1 year adjustment intervals: Loan amount: 150,000; annual rate cap: 2%; life-of-loan-cap: 5%; margin: 2.75%; first year contract rate: 5.5%; 1-year Treasury rate today: 6.25%; 1-year Treasury rate at end of year 1: 5.25%; 1-year Treasury rate at end of year 2: 5.5%; loan term in years: 30. Assume that the Treasury rate at its EOY 2 value for the remaining mortgage term. Given these assumptions, . If the upfront fees are 2% of the loan amount, what APR must the lender quote the borrower?

Explanation / Answer

FOLLOW THIS he annual percentage rate (APR) is the effective rate of interest that is charged on an installment loan, such as those provided by banks, retail stores, and other lenders. Since the enactment of the Truth in Lending Act in 1969, lenders have been required to report the APR in boldface type on the first page of all loan contracts. The truth in lending law "requires lenders to disclose in great detail the terms and conditions that apply to consumers when they borrow," according to an article in United States Banker. "Its purpose was to allow consumers to shop for credit by comparing the fine print." In the absence of such requirements, it would conceivably be possible for a lender to misrepresent a loan with a 20 percent effective interest rate as a 10 percent loan. However, the APR can be calculated in different ways and can sometimes cause rather than eliminate confusion. Loans and Interest Rates A loan is the purchase of the present use of money with the promise to repay the amount in the future according to a pre-arranged schedule and at a specified rate of interest. Loan contracts formally spell out the terms and obligations between the lender and borrower. Loans are by far the most common type of debt financing used by small businesses. The interest rate charged on the borrowed funds reflects the level of risk that the lender undertakes by providing the money. For example, a lender might charge a startup company a higher interest rate than it would a company that had shown a profit for several years. The interest rate also tends to be higher on smaller loans, since lenders must be able to cover the fixed costs involved in making the loans. The lowest interest rate charged by lenders

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