Some lenders charge an up-front fee on a loan, which is subtracted from what the

Question

Some lenders charge an up-front fee on a loan, which is subtracted from what the borrower receives. This is typically described as "points" (where one point equals 1% of the loan amount). The federal government requires that this be accounted for in the APR that discloses the loan's cost.

(a) A 30-year mortgage for $220000 has monthly payments at a 6% nominal annual rate. If a borrower's loan origination fee is 3% (3 points) and it is added to the initial balance, what is the true effective cost of the loan? What would the APR be?

Explanation / Answer

Interest=6/12 0.5 Interest Factor=(1.005)^(30*12) 6.02 A=P*F*i/(F-1)=220000*6.02*0.005/(6.02-1) 1319.12 Amount Paid in (30*12) instalments(A) 474884.46 Total Intetest Paid=A-220000 (B) 254884.46 Loan Origination fee=0.03*220000

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