(7 pts.) You are considering purchasing a house for $550,000, which you plan to
ID: 2802761 • Letter: #
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(7 pts.) You are considering purchasing a house for $550,000, which you plan to finance using an 80% LTV ance will be required). First Bank of American Dreams is offering a 30-year, fully amortizing, fixed-rate mortgage at 5% with monthly payments. This loan charges a 1% origination fee, 2 discount points, and a 4% prepayment penalty. First compute the APR and then compute the ER assuming that you will sell the home and pay off the loan in 14 years. For the ER part, you may assume that you never pay anything above the required amount prior to prepaying it at 14 years. Please label your answers clearly as I cannot give you credit for numbers I cannot find. Show me as much work as you can, as that is how I assign partial credit.Explanation / Answer
8Anerican bank is financing 80% LTV i.e loan to value, amount of loan would be $55000*0.80 = $440000
As bank will charge 1% of origination fee and 2 % of discount points and 4% prepayment penalty total amount of which is Origination fee 1% of $440000 i.e. 4400 and 2% of 440000 i.e. 8800 and for prepayment penalty as loan is paid in 14th year; WDV of loan in 14th year is ($440000 - $440000*14/30) i.e. 234667 hence prepayment would be on 4% of 234667 i.e $9387
Calculating monthly payments formula for which is
Total cost of loan is (440000+4400+8800+9387) = 462587
Total interest payments for 14 years is = (440000*5%*14 years ) = 308000/(14*462587) = 4.75%, what does er stands for
Now APR is =308000/462587
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