You are considering a thirty-year home loan of $320,000. A prospective lender has quoted an APR of 3% (compounded monthly) plus two points. A “point” is one percent of the loan’s amount and is deducted from the loan proceeds. Thus, for a $100,000 loan, the lender would only give you $99,000 if the lender charged one point. However, your monthly payment would still be based on the entire $100,000 amount.
a. What would be the amount of your monthly payment on this loan?
b. How much would the lender actually give you on this loan?
c. What is the EAR on this loan? The EAR is the annual rate the equates your monthly payments to the actual amount that you received from the lender.