Question

you can afford a 1200 per month mortgage payment
you found a 30 year loan at 6% interest

a) how big of a loan can you afford?

b) how much total money will be paid to the loan company?

c) how much of that money is interest?

Answer 1

a)

Loan amount can be computed using formula for EMI as:

EMI = P x r x (1+r) n/[(1+r) n – 1]

P = EMI x [(1+r) n – 1]/ r x (1+r) n

P = Principal of loan

EMI = Equated monthly instalments = $ 1,200

r = Rate per period = 0.06/12 = 0.005 p.m.

n = Number of periods = 30 years x 12 months = 360 periods

P = $ 1,200 x [(1+0.005)360 – 1]/ [0.005 x (1+0.005)360]

   = $ 1,200 x [(1.005)360 – 1]/ [0.005 x (1.005)360]

= $ 1,200 x (6.02257521226289– 1)/ (0.005 x 6.02257521226289)

  = $ 1,200 x (5.02257521226289/ 0.0301128760613144)

   = $ 1,200 x 166.791614392333

   = $ 200,149.9372708 or $ 200,150

A loan of $ 200,150 is affordable.

b)

Total loan payment = EMI x Number of EMI

                               = $ 1,200 x 360 = $ 432,000

Total money of $ 432,000 will be paid to loan company.

c)

Amount of interest = Total loan payment – Principal amount of loan

                               = $ 432,000 - $ 200,150 = $ 231,850

Total interest amount of the loan is $ 231,850