Question

1. If you borrow $350,000 for 30 years at 4% annual interest rate to buy a house, how much would you have to pay “at the end of each year” to the bank to pay it off over the full period?  If you had to pay “monthly” instead of “annually,” would the total cost be more, the same, or less?

Answer 1

Annual installment = R * PV / ( 1-(1+R)^-N)

Where, R = Rate of Interest

PV = Principal or loan amount

N = Number of periods

= 350000 * 4% / ( 1 - (1+4%)^-30)

= 14000 / ( 1 - (1.04)^-30)

= 14000 / ( 1 - 0.30831866797)

= 20240.5346967

So, The Yearly Payment will be closest to $20240.5346967

2. If the payment is Made monthly then the total cost wil be less because when we make monthly payment it reduces the balance to be paid which reduces the interest amount to be paid. Thus, it lowers the cost