1. Calculate the maximum value of a home which a buyer may purchase based on a...

1. Calculate the maximum value of a home which a buyer may purchase based on a pre-approved mortgage with the following characteristics.

	Loan Amount		80%	of Purchase Price
	Loan Term (nper)		20	years	240	months	fully amortizing
	Payments (PMT)		$1,750	per month
	Interest Rate (i)		3.95%	per year	0.33%	per month
	Future Value (FV)		0	(fully amortizing)

	Maximum Value of Loan (PV)

		Maximum Value of Home

Expert Solution

Compute the present value (PV) of loan, using the equation as shown below:

Present value = Monthly payments*PVIFA_{0.33%, 240 months}

= $1,750*165.5973

= $289,795.28

Hence, the PV of the loan is $289,795.28.

Working note:

Compute the PVIFA factor at 0.33% and 240 months, using the equation as shown below:

PVIFA = {1 – (1 + Rate)^{-Number
of periods}}/ Rate

= {1 – (1 + 0.0033)^-240}/ 0.33%

= 165.5973

Hence, the PVIFA at 0.33% and 240 payments are 165.5973.

Compute the value of the home, using the equation as shown below:

Home value = Loan value/ Percentage of loan

= $289,795.28/ 80%

= 362,244.10

Hence, the value of the home is $362,244.10.

jeff jeffy answered 9 months ago

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