What would be the APR for a $500,000 straight loan with an interest rate of 5% and 3 points over one year?

To understand why the Annual Percentage Rate (APR) calculated in this scenario might be close to 5.23%, it's essential to consider how APR includes both the interest rate and any additional costs associated with taking out the loan, such as points.

In this case, you have a straight loan of $500,000 at a 5% interest rate. The interest on this loan over one year would simply be 5% of $500,000, which equals $25,000. Points are fees paid upfront to lower the interest rate and are calculated as a percentage of the loan amount. With 3 points on a $500,000 loan, the cost would be 3% of $500,000, which equals $15,000.

To calculate the APR, you need to factor in both the interest cost and the upfront costs (points). Therefore, the total cost of the loan over one year is the interest payment plus the points: $25,000 (interest) + $15,000 (points) = $40,000.

To find the effective cost as a percentage of the loan amount, you divide the total cost by the loan amount and then express it annually. So, if you take the total cost ($40