A real estate investor wants to buy a property for $300,000 using an 80% LTV first-lien mortgage loan. A lender offers a 30-year fully amortizing CPM loan at 6% with monthly repayments. The loan requires the borrower to pay an origination fee of $5,000 upfront.
1. How much would the lender actually disburse (net loan proceeds)?
2. What is the effective interest rate on the loan if the mortgage is paid off as originally scheduled?
3. If the investor prepays the loan at the end of year 5, what will be the effective interest rate? What explains the rate difference between questions 2 and 3?
4. Assuming the lender charges a 2% prepayment penalty on the outstanding loan balance, what will be the effective interest rate if the investor prepays the loan at the end of year 10?