Question

You take out a mortgage loan from Bank A with the following characteristics: compounding period is monthly loan is for $200,000 APR = 6% life of loan is 30 years this mortgage loan has 2 points What is your true cost of borrowing? That is, what is the effective annual rate on your mortgage loan? Do not round at intermediate steps in your calculation. Report the rate in percent to three decimal places.

Group of answer choices 6.742% 6.368% 6.523% 6.168%

Answer 1

Effective annual rate (EAR) on the mortgage loan

Monthly interest rate (r) = 0.50% per month (6.00% / 12 Months)

Compounding Periods (n) = 12 Months

Effective annual rate = [(1 + r)^n - 1

Effective annual rate = [(1 + 0.0050)^12 - 1

Effective annual rate = 1.061677812 - 1

Effective annual rate = 0.061677812 or

Effective annual rate = 0.061677812 or

Effective annual rate = 6.168% (Rounded to 3 decimal place)

Therefore, the Effective annual rate (EAR) on the mortgage loan will be 6.168%