You are planning to purchase a house that costs $480,000. You plan to put 20% do

Question

You are planning to purchase a house that costs $480,000. You plan to put 20% down and borrow the remainder. Based on your credit score, you believe that you will pay 3.99% on a 30-year mortgage.

1. Use function “PMT” to calculate your mortgage payment.

2. Use function “PV” to calculate the loan amount given a payment of $1500 per month. What is the most that you can borrow?

3. Use function “RATE” to calculate the interest rate given a payment of $1500 and a loan amount of $400,000.

4. For each scenario, calculate the total interest that you will have paid once the mortgage is paid off. (There is not a function for this, enter the formula into the cell.)

5. For each scenario, calculate the total cost of the home purchase. (Down payment plus principle (loan amount) plus interest.)

6. Assume that you plan to pay an extra $300 per month on top of your mortgage payment, calculate how long it will take you to pay off the loan given the higher payment. (Use interest rate of 3.99%). Calculate how much interest you will pay in total? Compare this to the value that you calculated for

#2. You want to determine whether or not you should save some of your money and put only 10% down on your house. Because you are only putting 10% down, lenders require that you purchase private mortgage insurance (PMI). Assume that PMI is 1% of the mortgage amount.

7. Calculate your total monthly payment (mortgage payment plus PMI).

8. Calculate the total cost of financing your home purchase (interest plus PMI).

9. Calculate the total cost of the home purchase. (Down payment plus principle (loan amount) plus interest plus PMI.) 10. Compare this to the costs associated with a 20% down payment.

Explanation / Answer

1. Amount to be borrowed = 480,000*0.80 = 384,000

No. of periods = 12*30 = 360 months

Interest = 0.0399/12 (assumming 3.99% is interesr per annum)

Function = PMT(0.0399/12,360,-384000) = $1,831.06

2. The monthly mortgage payment = $1,500. Interest and number of periods remain same as above.

Function = PV(0.0399/12,360,-1500) = 314,571.16

The most that you can borrow for $1,500 monthly mortgage payment = 314,571.16

3. Loan amount = 400,000

Monthly mortgage payment = 1,500

Fuction = RATE(360,1500,-400000)*12 = 2.11%

Thus, the interest rate = 2.11%

4. Calculation of interest in each case:

5. Calculation of total cost of house

Case 1 Case 2 Case 3 A Monthly mortgage 1831.06 1500 1500 B No. of Months 360 360 360 C Principal borrowed 384,000 314,571.61 400,000 D Total repayment made (A*B) 659,182.18 540,000 540,000 E Interest portion (D-C) 275,182.18 225,428.39 140,000

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