1-ONB01 > Discussions>Unit 3 DQ1: Mortgages Payable This is a graded discussion:

Question

1-ONB01 > Discussions>Unit 3 DQ1: Mortgages Payable This is a graded discussion: 15 points possible due Apr 15 Unit 3 DQ1: Mortgages Payable 13 Your friend has just purchased a house and has incurred a $150,000, 4.5% mortgage payable at $760.03 per month. After making the first monthly payment, he receives a statement from the bank indicating only $197.53 had been applied to reducing the principal amount of the loan. Your friend then calculates that at the rate of $197.53 per month, it will take 63 years to pay off the $150,000 mortgage. Discuss and explain whether your friend's analysis is correct or not. (15 Points) Subscribe

Explanation / Answer

Solution:

In mortagage loan, as we pay monthly installments, interest component is higher and principal component is lower in starting and gradually interest component decreased and principal component increased. My friend calculated 63 years to pay off loan considering all EMI will contain $197.53 for principal reduction and $562.50 for interest. However he is not correct as principal amount will increased in later EMIs

Now assume required time to payoff the loan : n monthly periods

Present value of EMI at 0.375% (4.50/12) rate of interest at n period will be equal to amount of loan = $150,000

$760.03 * cumulative PV Factor at 0.375% for n periods = $150,000

cumulative PV Factor at 0.375% for n periods = 197.36063

Now this PV factors fall at n = 360

Hence time taken to pay off loan = 360/12 = 30 years

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