Question
Youve found your dream house/apartment/room, and you apply for a $500,000 mortgage from your local bank after seeing an ad on your Instagram feed for
Youve found your dream house/apartment/room, and you apply for a $500,000 mortgage from your local bank after seeing an ad on your Instagram feed for a 7.50%, 30-year mortgage. After you show your W-2 (wage statement) to the loan officer, the bank concludes that you may not be able to afford the monthly payment. They, therefore, offer you a rate of 7.00% (APR) but you must also pay an upfront fee of 3 points. A point, in loan parlance, means 1% of the loan amount. Thus, if you borrow $100,000 and pay 3 points, you must pay $3,000. Even though you receive only the loan proceeds less the points paid, you must repay the entire amount using the amortization schedule for that amount. Points paid are economically equivalent to additional interest on the loan, except the interest is paid upfront. (You should convince yourself that the result is the same whether the bank deducts the points from the loan proceeds or you write a separate check for them.)
Question 1: What is your true interest rate (use APR) as a result of paying the 3 points assuming that you pay off the loan over the original 30-year term? [Use Rate in Excel].
Hint: The PMT is calculated using the loan amount, but the amount you receive is the loan amount less the points.
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