[8 pts] John wants to buy a property for $105,000 and wants an 80% loan. The len

Question

[8 pts] John wants to buy a property for $105,000 and wants an 80% loan. The lender indicates that a fully amortizing loan can be obtained for 30 years at 12% MEY, with loan origination fees (all lender controlled fees) of $3,500.

[1] How much will the lender actually disburse?

[3] What is the effective interest cost to the borrower, assuming that the mortgage is paid off after 30 years?

[2] If John pays off the loan after 5 years, what is the effective interest charge? Why is it different from the APR in b?

[2] Assume the lender also imposes a prepayment penalty of 2% of the outstanding balance if the loan is repaid within the first 8 years of closing. What is the effective cost of the loan if John repays after 5 years?

Explanation / Answer

1. The lender will disburse 80% of the loan which is $84,000

2. Monthly payments will be pmt(0.12/12,30*12,84000) = 864.03. Hence Total Payment over 30 years will br 864.03*360 = 311,050.80 . Interest rate cost to the borrowers is 311050.80-84000 = $227,050.8 +3500 (loan origination fee) = $230,550.08

3. If he pays of in 5 year, his monthly installment will be 1868.53 and the full loan will be 112,111.80. His interest component will be 28,111.80 + 3500 = $31,611.80 now. Hence its advised to go for prepayment.

4. If there is prepayment penalty of 2% his total oustanding will be 112,111,80*1.02 = 114,354. His effective cost of loan will be $33,852

4.

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