A couple recently married is considering the purchase of a $250,000 home. They h

Question

A couple recently married is considering the purchase of a $250,000 home.  They have no savings of their own and are contemplating funding the cost through a combination of three sources: a loan from other family members of $10,000 at 2% interest, a first mortgage of $200,000 at 4% interest, and a second mortgage of $40,000 at 8% interest.  Calculate the overall rate of interest the couple will pay using this arrangement.  If you answer using a percent, please include a minimum of two significant digits in your answer.  If you answer using a decimal, please include a minimum of four significant digits in your answer.

Explanation / Answer

Well, they will interests in the following way:

a) Family members - 10000*2% = 200

b) First mortagage - 200,000*4% = 8000

c) Second mortagage - 40,000*8% = 3200

Total interest paid = 11,400

Overall rate of interest = 11,400/250,000 = 0.0456 = 4.56%

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