Question
Assume that you can get a home loan from your local cooperatively owned credit union. It is a $375,000 loan, but you must pay a
Assume that you can get a home loan from your local cooperatively owned credit union. It is a $375,000 loan, but you must pay a $1000 not refundable processing fee, and you must purchase stock in the amount of $2000.00 which earns nothing (but you get it back at the end of the loan period). The annual interest rate offered would be 6.6%, and you would make MONTHLY payments for 15 years until the loan is paid off.
a. Calculate the Monthly payment on the $375,000 loan at 6.6% annual interest
b. What would be the period 0 cash flow (loan proceeds the stock purchase the processing fee).
c. What would be the final period cash flow (the final payment + the stock back).
d. Set the problem up in a spreadsheet and calculate the IRR of the cash flow stream. (be sure to convert it back to an annual rate and go to 4 places past the decimal)
Suppose you have another option of borrowing the $375,000 from a local bank. There is no stock purchase requirement, and no processing fee. The bank will loan you the money on a 15 year Monthly payment plan for 6.68% annual interest. Calculate the annual IRR of this cash flow stream. Which is the better deal (Bank or Credit Union), and why.
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