Four years ago, you bought a home for $200,000. You paid $20,000 down and agreed

Question

Four years ago, you bought a home for $200,000. You paid $20,000 down and agreed to a 30-year mortgage with a 6% annual interest rate (APR). You have made regular monthly payments and periodic repairs that have kept the book value of your home at $200,000. Since you purchased the home, the housing market has slumped so that the market value of your home is now $150,000. Though the market rate of interest is still 6%, the government is subsidizing loans so that current interest rates are also lower. If you refinance your loan at the government rate, you will amortize the amount you still owe under the original mortgage over 30 years, and your payment will be $750 per month. What is the effective annual rate (EAR) on your new loan?

a. 3.30% b. 3.40% c. 3.50% d. 3.60%

Explanation / Answer

Answer is   d. 3.60%

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