You take out a mortgage loan from First Bank of Terlingua with the following cha
ID: 2619286 • Letter: Y
Question
You take out a mortgage loan from First Bank of Terlingua with the following characteristics: compounding period is monthly loan is for $200,000 APR = 3.94% initial maturity is 30 years this mortgage loan has no points Now suppose that First Bank allows you to accelerate your loan payments by paying an additional $100 each month. (We assume that the bank does not charge a fee for exercising this option.) When we take the acceleration into account, what is your effective annual rate? Do not round at intermediate steps in your calculation. Report the rate in percent to three decimal places. Do not type the % symbol.
Explanation / Answer
Monthly APR = 3.94% = 3.94/12 = 0.3283%
By using the PMT function in excel we can get the monthly payment to be made in $947.88
=PMT(0.3283%,360,200000)
= $947.88
The total payment to be made will be 947.88*12*30 = $341236.80
To calculate the the effective annual rate after taking into account the acceleration, we can use the rate function in excel
=RATE(360,947.88,-200000,341236.80)
=0.00538
Annual Effective Rate would be 0.00538*12 = 0.0646
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