Question

In: Accounting

A home has price $260,000. After a down payment of $40,000, the rest is financed over...

A home has price $260,000. After a down payment of $40,000, the rest is financed over 25 years at an annual interest rate of 6% compounded monthl y. a) Use the appropriate table in your book to find the monthly payment to the bank. (Do NOT use annuity formulas). b) Suppose that annual taxes are $3120 and homeowner’s insurance has an annual premium of $720. Lenders often collect these amounts in equal monthly installments along with the mortgage payment and pay the taxes and insurance when they are due during this year (this is called escrowing). If the annual premiums are split evenly over 12 months and added to the principal/interest payment in (a), find the total monthly amount that is then sent to the bank each month. c) How much interest is paid over the life of the mortgage? Remember that insurance and taxes are not included in this.

Textbook is Mathematics for Business 10th edition

Solutions

Expert Solution

a) Monthly installment = principle * i/c * (1 + i/c)^nc / (1 + i/c)^nc -1

= 220000 (0.06/12) (1+ 0.06/12)^25*12 / (1+ 0.06/12)^25*12 - 1

= 220000 * 0.005 * 4.4649698121 / 3.4649698121

= 1417.46

b) Taxes and insurance premiums are evenly split over 12 months, then banks monthly collection would be : 1417.46 + (3120 / 12) + (720 / 12) = 1737.46

c) Mortgage total interest during life = 1417.46 * 300 - 220000 = $205238


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