Question

You expect to graduate with $18,957 in student loans. The interest rate on your loan is 7.3 percent compounded monthly and the loan calls for fixed monthly payments. If you repay the loan in 30 years how much are you paying in total interest over the life of the loan? (HINT: you need to calculate the monthly payment first).

You are excited to buy your first house. Based on your credit history, the bank is willing to lend you money at 4 percent interest compounded monthly. You can afford monthly payments of $1,876. How much can you afford to borrow? Assume the mortgage is for 17 years.

Answer 1

1. You expect to graduate with $18,957 in student loans. The interest rate on your loan is 7.3 percent compounded monthly and the loan calls for fixed monthly payments. If you repay the loan in 30 years how much are you paying in total interest over the life of the loan?

Effective monthly interest rate, r = 7.3%/12 = 0.006083333333

n = 30 * 12 = 360 monthly payments

Total interest paid = PMT * n - loan amount

Total interest paid = 129.9636808838 * 360 - 18,957

Total interest paid = $27,829.925118168

2. You are excited to buy your first house. Based on your credit history, the bank is willing to lend you money at 4 percent interest compounded monthly. You can afford monthly payments of $1,876. How much can you afford to borrow? Assume the mortgage is for 17 years.

n = 17 * 12 = 204 monthly payments

PMT = 1,876

r = 4%/12 = 0.003333333333

The amount we can afford to borrow = $277,353.3500648553