What is the effective cost of loan

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Reference no: EM131882647

A homeowner purchases a property for $500,000. He finances the purchase with an 80% LTV, 30-year fully amortizing GPM carrying a 10% interest rate. An 8% rate of graduation will be applied to monthly payments beginning year 2 and the beginning of year 3, only (payments in years 3 and 4 and on are the same). The homeowner will sell the property after 5 years and does not curtail the loan. Upfront fees amount to 3% of the loan amount, and a soft prepayment penalty of 3% applies.

A. What is the first year’s payment?

B. What is the OLB at the end of year 5?

C. What is the effective cost of the loan?

D. All else equal, would you expect the note rate for an equivalent fully amortizing, constant payment mortgage to be <, > or = to 10%? Explain your answer.

Reference no: EM131882647

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