Consider a 20-year (monthly-payment), 8%, $80,000 mortgage with 2 points prepaid interest up front. What is the "effective interest rate" or yield over the borrower's expected holding period if the borrower expects to hold the loan for 12 years?

Question

Quizplus · Accepted Answer

The effective interest rate accounts for the upfront cost of the points paid (2% of the loan amount), which effectively increases the interest rate over the life of the loan. The calculation provided in option C correctly adjusts the present value to account for the points paid upfront and recalculates the interest rate based on the expected holding period of 12 years, resulting in an effective interest rate of 8.31%.

Consider a 20-Year (Monthly-Payment), 8%, $80,000 Mortgage with 2 Points