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Mr
Mr. Jack is considering a home equity loan, but he needs to know the real cost of borrowing in the following case. A home equity loan is advertised at three percent compounded quarterly, however, there is a legal fee of $850 and an appraisal fee of $650 to set up the house as collateral. If Mr. Jack needs to borrow $35,800 for one year, at which time will be able to repay the full amount, what is the effective rate of borrowing the $35,800 for the year?
Expert Solution
Computation of Effective Rate of Borrowing:
EAR = (1+i/n)^n -1
Here,
n is number of times compounding in a period
EAR = (1+ .03/12)^12-1
= (1+ .0025)^12-1
= (1.0025)^12-1
= 1.0304 -1
= .0304 or 3.04%
Other charges =(850+650)/35800
= 1500 /35800
= .0419 or 4.19%
Total cost= 3.04%+4.19% = 7.23%
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