| Effective interest rate
Hello,
I have a mortgage of $500,000 with a monthly payment of $2908.02 at interest rate of 5%, amortized over life of mortgage which is 25 years. The effective monthly rate is then 0.4124%. We also incur $50,000 in transaction costs that is paid as a lump sum when the mortgage originates. On the balance sheet, we amortize the cost of those transaction costs over the mortgage term which is 5 years so it is classified as a deferred expense. The mortgage payable is shown as a liabilities.
The problem is that due to FASB rules, we have to net the two numbers and derive a new effective rate. The way I have done this is $500,000 - $50,000 = $450,000. I use the same monthly payment of $2908.02 over 25 years and derive a monthly effective rate of 0.50262% to bring down the balance on the 25th month.
The question I have is whether my calculation is correct because the $50,000 is amortized over 5 years not 25. I am not sure if it matters to the calculation of the new effective rate.
Thanks
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