Question

Calculate effective costs,

Loan ;$100000

Internet ; 7%

Term; 180 months

Upfront costs 7%

A) calculate monthly payments

B) how much still owe after repayment

C) what is effective interest given points on loan

Answer #1

A, M = P r(1+r)^{n} / (1+r)^{n} - 1

M = ?

P = $100000

r = monthly interest rate 7/12= .0058

n= 180 months

M= 100000 .0058(1+.0058)^{180} / (1+.0058)^{180}
- 1

= 100000 * .0058(2.83) / (2.83) - 1

= 100000 * .016 / 1.83

M = 100000 * .008743

M = $ 874.31

B, $ 874.31 should be paid for 180 months for $100000 borrowed loan

= 874.31 * 180 = $157375.8

Interest amount = $157375.8 - $100000 = $57375.8

Upfront cost = 7% Upfront fee is collected by the bank at initial stage

= 100000* 7% = $7000

So total money owe = $157375.8 + $ 7000 = $ 164375.8

C. Effective interest

EAR = (1+r/12)^{n} - 1

= (1+.07/12)^{12} - 1

= (1+ .0058)^{12} - 1

=1.07 - 1

=.0719

= 7.19%

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