Question

13. John wants to buy a property for $105,000 and wants an 80 percent loan for $84,000. A lender indicates that a fully amortizing! loan can be obtained for 30 years (360 months) at 8 percent interest; however, a loan fee of $3,500 will also be necessary for John to obtain the loan. a. How much will the lender actually disburse? b. What is the APR for the borrower, assuming that the mortgage is paid off after 30 years (full term)? c. If John pays off the loan after five years, what is the effective interest rate? Why is it different from the effective interest rate in (b)? d. Assume the lender also imposes a prepayment penalty of 2 percent of the outstanding loan balance if the loan is repaid within eight years of closing. If John repays the loan after five years with the prepayment penalty, what is the effective interest rate? 14. Our borrower, John, in problem 13 wants to "roll in"lor finance the loan fee of $3,500 into the loan amount which would make the loan $87,500. Answer parts (a) through (d) from problem 13 assuming that the lender agrees to allow the loan fees to be included in the loan amount. 15 Alandar in omnidi

I just need question 14

Answer 1

(a) the lender will actually disburse = $ 87500 because loan fee amounting to $3500 will form part of the loan.

(b) Annual percentage rate will be= 8.33%

8/84000*87500 = 8.33%

(c) Effective rate of interest if loan is repaid after 5 years-

Cash inflow= $87500

Year ended	Contractual cash outflow	PV factor @10%	Present value	PV factor @7%	Present value
1	7288.75	0.909	6625.24	0.934	6807.69
2	7288.75	0.826	6020.50	0.873	6363.08
3	7288.75	0.751	5473.85	0.816	5947.62
4	7288.75	0683	4978.22	0.763	5561.32
5	7288.75+ 87500	0.621	58863.81	0.713	67584.37
	TOTAL		81961.62		92264.09

The effective rate of interest= 7%+{(92264.09-87500)/(92264.09-81961.62)}*3

= 8.387%

(d) If repayment penalty is 2% of outstanding amount then the effective rate of interest will be-

Year ended	Contractual cash outflow	PV factor @10%	Present value	PV factor @7%	Present value
1	7288.75	0.909	6625.24	0.934	6807.69
2	7288.75	0.826	6020.50	0.873	6363.08
3	7288.75	0.751	5473.85	0.816	5947.62
4	7288.75	0683	4978.22	0.763	5561.32
5	7288.75+ 87500+1750	0.621	59950.56	0.713	68832.129
	TOTAL		83048.373		93511.838

The effective rate of interest= 7%+{(93511.838-87500)/(93511-83048.373)}*3 = 8.723%