Given the following information, calculate the Effective Borrowing Cost (EBC). Loan amount: $175,000, Term: 30 years, Interest rate: 7 %, Payment: $1,164.28, Discount points: 1 point, Origination fee: $3,250. Assume the loan is held until the end of year 10.
A) 0.6%
B) 3.8%
C) 7.0%
D) 7.4%

Question

Quizplus · Accepted Answer

To calculate the Effective Borrowing Cost (EBC) when the loan is held until the end of year 10, we need to consider the interest rate, fees, and the time the loan is held. The discount points and origination fee increase the upfront cost of the loan, which affects the EBC. Given the loan amount of $175,000, a 1 point discount equals 1% of the loan amount, or $1,750. Adding the origination fee of $3,250 gives a total upfront cost of $5,000. The monthly payment is $1,164.28 for 10 years (120 payments), leading to a total payment of $139,713.60 over 10 years. Adding the upfront costs, the total cost is $144,713.60. The EBC is higher than the nominal interest rate of 7% due to these additional costs. Without the exact formula and calculations provided in the options, the closest and most logical choice considering the impact of these costs on the overall borrowing cost is 7.4%.

Given the Following Information, Calculate the Effective Borrowing Cost (EBC)