You are considering buying a new house, and have found that a $200,000, 30-year

Question

You are considering buying a new house, and have found that a $200,000, 30-year fixed-rate mortgage is available with an interest rate of 6 percent. This mortgage requires 360 monthly payments of approximately $1,179 each. If the interest rate rises to 7 percent, what will happen to your monthly payment? Instruction: Round to the nearest dollar The monthly payment will be $ . Instruction: Round to the nearest tenth of a percent. The change in the monthly payment will be percent while the change in the interest rate will be percent.

Explanation / Answer

New Monthly interest rate (r) = 7% / 12 = 0.5833%

Number of months (N) = 30 x 12 = 360

New Monthly loan repayment ($) = Loan amount (L) x [r x (1 + r)N] / [(1 + r)N - 1]

= 200,000 x [0.005833 x (1.005833)360] / [(1.005833)360 - 1]

= 200,000 x (0.005833 x 8.1165) / (8.1165 - 1)

= 200,000 x 0.0473 / 7.1165

= 1,331

So, increase in monthly payment = $(1,331 - 1,179) = $152

Increase in monthly interest rate = (7% - 6%) / 12 = 1% / 12 = 0.0833%

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