Question

Given the following information, calculate the effective borrowing cost (rounded to the nearest tenth of a percent). Loan amount: $185,000 Term: 30 years, Interest rate: 7.25%, Monthly Payment: $1,262.00, Discount points: $2,500 and Other Closing Expenses: $3,611.

Answer 1

Original Loan amount is $185,000, Discount points is $2,500 and Other Closing Expenses $3,611.

So, Total Borrowing = $185,000 + $2,500 + $3,611

= $191,111.

Value of Total Borrowing is $191,111.

Monthly Payment on Total borrowing cost is calculated in excel and screen shot provided below:

Monthly Payment on Total borrowing cost is $1,303.71.

Original Loan amount is $185,000 and you have to pay $1,303.71 monthly for 30 year because of closing cost and Discount point. So, effective cost of borrowing is calculated in excel and screen shot provided below:

Effective monthly rate on loan is 0.63%.

Effective annual rate = [(1 + 0.63%) ^ 12] - 1

= 1.0785 - 1

= 7.85%

effective borrowing cost is 7.85%.