Consider a 30-year monthly-payment), 6%, $300,000 mortgage with 3 points prepaid interest up front. What is the yield to maturity?

Question

Quizplus · Accepted Answer

The yield to maturity on a mortgage that includes points prepaid upfront is higher than the nominal interest rate due to the upfront cost of the points. Points are a form of prepaid interest that reduce the amount of money borrowed effectively but increase the yield for the lender because they are paid upfront. In this case, with a 6% nominal rate and 3 points prepaid, the yield to maturity would be higher than 6%, making 6.29% a plausible answer given the options. Calculating the exact yield to maturity would require a detailed calculation taking into account the effect of the prepaid points on the effective loan amount and the amortization schedule, but among the given choices, 6.29% is the only rate higher than the nominal rate that accounts for the additional cost of the points.

Consider a 30-Year Monthly-Payment), 6%, $300,000 Mortgage with 3 Points