Question

Tom Burke bought a home in Virginia for $125,000. He puts down 40% and obtains a mortage for 30 years at 11%. If Tom could have obtained a 1% reduction from 11% to 10% in the mortgage rate, by how much would his monthly payment be reduced?

Answer 1

Calculation of reduction in monthly payment

Total Amount payable for home=$125,000

Down payment                        40%= $50,000

Balance amount financed =          $75,000

Monthly installment payable @11% interest =P*r(1+r)ⁿ/{(1+r)ⁿ-1

P=Total loan =$75,000

r=monthly interest=11%/12=0.916667%

                n=12*30=360installments

Monthly payment @11% int. =$75000*0.00916667(1+0.00916667)³⁶⁰/{(1+0.00916667)³⁶⁰-1}

                                                      =$75,000*0.0091667*26.7081/(26.7081-1)

                                                         =$75,000*0.244824/25.7081

                                                          =$18,361.8/25.7081=$714.24

Monthly installment payable @10% interest =P*r(1+r)ⁿ/{(1+r)ⁿ-1

P=Total loan =$75,000

r=monthly interest=10%/12=0.83333%

                n=12*30=360installments

Monthly payment @10% int. =$75000*0.0083333 (1+0.0083333)³⁶⁰/{(1+0.0083333)³⁶⁰-1}

                                                      =$75,000*0.0083333*19.8374/(19.8374-1)

                                                         =$75,000*0.1653116614/18.8374

                                                          =$12398.37461/18.8374=$658.18

Monthly installment will be reduced by($714.24-$658.18)=$56.06