Question

A builder is offering $139,371 loans for his properties at 9 percent for 25 years. Monthly payments are based on current market rates of 9.5 percent and are to be fully amortized over 25 years. The property would normally sell for $150,000 without any special financing. Required: a. At what price should the builder sell the properties to earn, in effect, the market rate of interest on the loan?

Answer 1

To earn the market rate of interest on the loan, the builder should sell the properties for approximately $153,827.

Step-by-step explanation:

To earn the market rate of interest on the loan, the builder should sell the properties for a price that will result in the same monthly payments as the current market rates of 9.5 percent.

To calculate the selling price, we can use the formula for the monthly payment on a fully amortized loan:

Payment = Loan Amount x Monthly Interest Rate / (1 - (1 + Monthly Interest Rate) ^ -Number of Payments)

Setting the current market rate at 9.5 percent, the loan amount at $139,371, and the number of payments at 25 years (300 months), we can solve for the selling price.

By rearranging the formula, we find:

Selling Price = Payment x (1 - (1 + Monthly Interest Rate) ^ -Number of Payments) / Monthly Interest Rate

Substituting the values, the builder should sell the properties for approximately $153,827 in order to earn the market rate of interest.