Question

The next four questions are related to your purchase of your first home for $600,000.

You have just purchased the house and have put a 20% down payment, and will borrow the remaining amount.  The 15-year fixed rate loan has an Annual Percentage Rate (APR) of 3.875%.   You will make monthly payments for the life of the loan.

Your effective interest rate is closest to which of the following?

Select one:

a. 3.875%

b. 3.8078%

c. 4.1446%

d. 3.9446%

Answer 1

We know the formula to find Effective interest rate. i.e

Where,
E = Effective interest rate
i = Annual percentage rate (APR)
a = number of payments in a year.

If the payments are monthly, then the number of payments in a year is 12. Therefore, in our solution a = 12.
And i = 3.875% can be written as 0.03875.

Substituting the values in the formula, we get:

OR

Therefore, the answer is d. 3.9446%