Question

Given the following information, calculate the effective borrowing cost (EBC): loan amount: $685,000; term: 30 years; interest rate: 4.5%; discount points: 1 point; third-party fees: $6,250. Assume the loan is held until the end of year 3. PLEASE USE FINANCIAL CALCULATOR & SHOW KEYSTROKES

Answer 1

STEP I : Calculate the monthly payment on the loan.

Inputs for the financial calculator -

N = 30*12

I = 4.5%/12

PV = $685000

CPT --> PMT

STEP II : Calculate the present value of prepaid loan.

Inputs for the financial calculator -

N = (30-3)*12

I = 4.5%/12

PMT = -(as calculated in Step I)

CPT --> PV

STEP III : Calculate the total costs.

Discount = Discount point * Loan amount = 1%* $685000

Third-party fees = $6250

Total fees = Discount + Third-party fees

STEP IV : Calculate the monthly effective borrowing cost.

FV = (PV as calculated in Step II)

PMT = -(as calculated in Step I)

PV = Loan amount - Total Fees = $685000 - Total Fees (as calculated in Step III)

N = 3*12

CPT --> I/Y

STEP V : Calculate annual effective borrowing cost.

Annual EBC = I/Y (as calculated in Step IV) * 12