Question

Q-   Suppose after you graduate from University, you find a job that pays you $65,000 a year. Further suppose that you take out a home equity loan of $260,000 for 30 years at an annual interest rate of 3.5 percent, with payments to be made monthly. What will your monthly payments be? If the interest rate increases from 3.5 percent to 5.0 percent, how much will your monthly payments increase? Instead of 30 years, you decide to pay your loan in 25 years, what will your monthly payments be if the interest rate remains at 3.5 percent or increases to 5.0 percent. Develop a chart comparing these monthly payments. Show your work.

Answer 1

1) N=30 , I=3.5%

EMI = [P * I * (1+I)^N]/[(1+I)^N-1]

P =loan amount or Principal = 260000

I = Interest rate per month = .035/12 =0.00291666666
N = the number of installments = 30*12 =360

EMI = [260000*0.00291666666*1.00291666666^360]/[1.00291666666^360-1]

= [260000*0.00291666666*2.85328715837]/[2.85328715837-1]

= 2163.74275682/1.85328715837

= 1167.52

2) N=30 , I=5%

EMI = [P * I * (1+I)^N]/[(1+I)^N-1]

P =loan amount or Principal = 260000

I = Interest rate per month = .05/12 =0.00416666666
N = the number of installments = 30*12 =360

EMI = [260000*0.00416666666*1.00416666666^360]/[1.00416666666^360-1]

= [260000*0.00416666666*4.46774430333]/[4.46774430333-1]

= 4840.05632086/3.46774430333

= 1395.74

3) N=25 , I=3.5%

EMI = [P * I * (1+I)^N]/[(1+I)^N-1]

P =loan amount or Principal = 260000

I = Interest rate per month = .035/12 =0.00291666666
N = the number of installments = 25*12 =300

EMI = [260000*0.00291666666*1.00291666666^300]/[1.00291666666^300-1]

= [260000*0.00291666666*2.39582210807]/[2.39582210807-1]

= 1816.83176113/1.39582210807

= 1301.62

4) N=25 , I=5%

EMI = [P * I * (1+I)^N]/[(1+I)^N-1]

P =loan amount or Principal = 260000

I = Interest rate per month = .05/12 =0.00416666666
N = the number of installments = 25*12 =300

EMI = [260000*0.00416666666*1.00416666666^300]/[1.00416666666^300-1]

= [260000*0.00416666666*3.4812904451]/[3.4812904451-1]

= 3771.39797616/2.4812904451

= 1519.93

	I=3.5%	I=5%	Increase
N=30	1167.52	1395.74	228.22
Nn=25	1301.62	1519.93	218.31