3. Sid and Nancy have just bought a house for $118,500. They made an $6,500 down

Question

3.         Sid and Nancy have just bought a house for $118,500.   They made an $6,500 down payment, and financed the rest with a 30 year loan at an 7½% interest rate.

(a)        Find their monthly payment. (10 points)

(b)        Assuming they make their payments as scheduled, how much total interest will they pay? (5 points)

(c)        If they want to pay off their loan in 20 years instead of 30, how much extra would they need to pay each month? (10 points)

(d)        How much in total would they save by following the 20-year plan instead of taking 30 years?   (10 points)

(e)        Suppose that they decide that they can afford to pay an extra $75 per month above the 30 year payment. Nancy estimates this additional payment will reduce the term to about 15 years. Present an argument for or against her estimate. (5 points)

Explanation / Answer

We can derive the Monthly Payment by usiing The following formula in Excel

Monthly Payment= PMT(Rate,No. of Months, Amount)

Here Rate = 7.5/12= 0.00625

No. of Months= 360

Amount= 112,000

so the Monthly payment comest to $783.12

(b) Interest payment can be arrived at by deducting the Principal Payment from Total Payments

Total Payment= 360*783.13

Total Payment= $281923.20

Princiap =$1,12,000

Therefore Interest is = $169,923.20.

(c) If they want to make their payment within 20 years then they need to pay $902.26 per Month so thee will have to pay extra $119.14 per month.

(d) They Would pay total Money of $2,16,542.40 out of that if we deduct $1,12,000 then $104542.40 will be payable as interest which is $65380.80 Less than the earlier payment so they will save $65,380.80.

(e) If They can afford to pay $75 extra per Month then proabbly they will end up payment after 20 Years because in 20 Years Loan Period they have to Pay $119.14 per Month so by paying $75 extra they will be able to complete their loan only after 20 Years so their estimate that the term will reduce to 15 years is incorrect.

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