You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year mortgage loan for 80 percent of the $2,800,000 purchase price. The monthly payment on this loan will be $17,000.
What is the APR and ERA?
To find out the APR (Annual Percentage Rate) and ERA (Effective Annual Rate) for a mortgage loan, we need to know the interest rate and any associated fees. The monthly payment alone does not provide enough information.
However, we can make a reasonable assumption that the loan is of a fixed interest rate and does not have any additional fees, and use that information to calculate an approximate APR and ERA.
Step 1: Calculate the loan amount
Since the loan covers 80 percent of the purchase price, we can multiply the purchase price by 0.8 to find the loan amount:
Loan amount = $2,800,000 x 0.8 = $2,240,000
Step 2: Calculate the annual payment
To calculate the annual payment, we multiply the monthly payment by 12:
Annual payment = $17,000 x 12 = $204,000
Step 3: Calculate the interest rate
To find the interest rate, we need to divide the annual payment by the loan amount:
Interest rate = Annual payment / Loan amount = $204,000 / $2,240,000 = 0.0911
Step 4: Convert the interest rate to a percentage
The interest rate we calculated in step 3 is a decimal, so we multiply it by 100 to convert it to a percentage:
Interest rate = 0.0911 x 100 = 9.11
The APR would typically include any additional fees associated with the loan, but since we assumed there are none in this case, the APR would be approximately 9.11%.
The ERA refers to the effective annual rate, which takes compounding into account. Since the given information does not specify the compounding frequency, we assume it is compounded annually. In this case, the ERA would be the same as the APR, approximately 9.11%.