Florida General Contractor Practice Exam

What is the actual interest rate on a loan amounting to 100,000 at an interest rate of 12% with 4 points?

1. 10%

2. 12%

3. 14%

4. 16%

The correct answer is: 12%

To determine the actual interest rate on a loan, you need to account for both the nominal interest rate and any fees associated with the loan, which are expressed as points. In this case, the loan amount is $100,000 at a nominal interest rate of 12%, and there are 4 points. Points are fees that lenders charge at closing and typically represent a percentage of the loan amount. One point is equal to 1% of the loan amount. Therefore, 4 points would amount to 4% of $100,000, which equals $4,000. When considering the annualized cost of the loan, this fee must be factored into the effective interest rate. The borrower receives $100,000 but pays back more than this nominal amount due to the points. The adjusted loan amount the borrower effectively receives is $96,000 ($100,000 - $4,000). Given the borrower's obligation to pay back the $100,000 amount, this results in a higher effective interest rate than the nominal 12%. Calculating the effective interest rate involves considering the total interest paid over the actual amount received. When this is computed, the effective interest rate comes to approximately 12.5%, which would