Home loans typically involve “points,” which are fees charged by the lender. Eac

Question

Home loans typically involve “points,” which are fees charged by the lender. Each point charged means that the borrower must pay 1% of the loan amount as a fee. For example, if the loan is for $200,000 and 4 points are charged, the loan repayment schedule is calculated on a $200,000 loan but the net amount the borrower receives is only $192,000. What is the effective annual interest rate charged on such a loan assuming loan repayment occurs over 120 months? Assume the interest rate is .75% per month. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

Loan Amount =    200,000.00 Monthly interest amount = 200000*.75% =        1,500.00 Annual interest amount =      18,000.00 Net proceeds received from loan =    192,000.00 Effective annual interest rate = 18000/192000 = 9.38% Thus, effective annual interets rate is 9.38%

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