Two banks in the area offer 35-year, $270,000 mortgages at 6.5 percent and charg
ID: 2771258 • Letter: T
Question
Two banks in the area offer 35-year, $270,000 mortgages at 6.5 percent and charge a $4,500 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the loan application is denied, whereas that charged by I.M. Greedy and Sons Mortgage Bank is not. The current disclosure law requires that any fees that will be refunded if the applicant is rejected be included in calculating the APR, but this is not required with nonrefundable fees (presumably because refundable fees are part of the loan rather than a fee).
What are the EARs on these two loans? What are the APRs? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Two banks in the area offer 35-year, $270,000 mortgages at 6.5 percent and charge a $4,500 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the loan application is denied, whereas that charged by I.M. Greedy and Sons Mortgage Bank is not. The current disclosure law requires that any fees that will be refunded if the applicant is rejected be included in calculating the APR, but this is not required with nonrefundable fees (presumably because refundable fees are part of the loan rather than a fee).
Explanation / Answer
The loan amount is 270000 Charge of application fee is 4500 Effective Annual Rate Formula i = (1 + r/t)^t -1 Where r = R/100 and i = I/100; r and i are interest rates in decimal form. t is the number of compounding periods per year. The effective annual rate is the actual interest rate for a year. Annual Interest Rate (R) Effective Annual Rate (I) Insecurity Bank and Trust I.M. Greedy and Sons Mortgage Bank (Not refundable) (Refundable) EAR 6.69 % 6.69 % Compounded monthly APR 6.64 % 6.5 % APR-Annual percentage rate The annual rate that is charged for borrowing , expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan