Edward signs a 30 year mortgage at 3.5% compounded monthly. The price of his hou

Question

Edward signs a 30 year mortgage at 3.5% compounded monthly. The price of his house is $200,000. He makes a down payment of 40,000. Answer the following: (15 PTS)

What will be his monthly payments? – (5 PTS)

After 5 years, he makes a one-time payment of $50,000 (against the remaining principle). How many months will he have remaining on his mortgage? To avoid any confusion, he will have exactly 25 years remaining before he makes the $50,000 in payment. – (5 PTS)

Edwards decides that instead of reducing the NPER after making the $50,000, he requests the bank to keep the NPER to 25 years and reduce his monthly payment instead. What will be his monthly payment going forward? – (5 PTS)

Explanation / Answer

Calculation of Monthly payment using Preset value of annuity formula :

Present value of annuity = P * ((1-(1+r)^-n) / r

Present value = $ 200000

P = Monthly Payment to be calculated

r= monthly rate = 3.5% /12 = 0.00291666666

n= Number of months   =30 years * 12 = 360

Hence,

200000 = P * ((1-(1+0.00291666666)^-360)) / 0.00291666666)

200000 = P * (0.649527039 / 0.00291666666)

200000 = P * 222.6949853

P = 200000 /222.6949853

P = $898.09

Hence monthly installment shall be $898.09

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