Let\'s consider compounded interest in a different way - loans. When you borrow

Question

Let's consider compounded interest in a different way - loans. When you borrow money from a bank to buy a house, you are giving the bank the power of compounded interest. How is this the case? If you borrow $100,000 for a house using a 30-year loan at 3% interest, how much does the house actually cost? If you pay an extra payment every year (instead of paying 12 payments or 1 per month, you pay 13 total payments). How would this change the total amount borrowed over time?

P.S: Please answer all the questions

Explanation / Answer

Following is the formula to calculate the equated monthly installment for 13 months:-

EMI=Pricipal x interest rate x (1+interest rate)^loan term ÷ ((1+interest rate)^ loan term - 1)

Where, interest rate = 3/13/100=0.0025 & loan tenure=13 x 30 years= 390 months.

Therefore, EMI= 100,000 x 0.0025 x (1+0.0025)^390 ÷((1+0.0025)^390-1)=USD 402.

Hence, house will actually cost USD 402 x 30 years= USD 156665.

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