Question

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1.) Use the information to answer the following questions. A borrower takes a $325,000 mortgage loan from a bank. The terms are the loan are a 30-year term, a rate of 4.75%. (20pts)

a. Calculate the fixed monthly payment on this loan.

b. What is the total amount of money they would pay if they made every monthly payment and paid no more than the fixed payment amount.

c. How much interest do they pay over the life of this loan?

d. How much would the borrower save if they chose a 20-year term at 4.25% instead?

e. If someone could not afford the 20 year payment, how else might they go about reducing the amount of interest they pay on the loan?

Answer 1

Borrowed amount = $ 325,000

Loan term = 30 year = 360 months

Rate = 4.75% per year = (4.75/12)% per month

a. When interest rate is 4.75% per year. Assume the monthly payment is $ A.

Monthly payment = $ 1,695.35

b. Total payment = Number of payment ×Monthly payment

Total payment = 360 × 1,695.35 = $ 610,327.38

c. Interest = Total payment - Borrowed amount

Interest = 610,327.38 - 325,000 = $ 285,327.38

d. When interest rate is 4.25% and loan term is 20 years. Let us assume the monthly payment is $ A

Total payment = 2,012.51 × 240 = $ 483,002.89

Saving = 610,327.35 - 483,002.89 = $ 127,324.46

e. When the borrower is not able to pay the higher amount in that case they can borrow the amount for a longer period of time. Here, at a rate of 4.25% and for a term of 20 years the monthly payment is $ 2,012.51 if we will increase the loan term then the monthly payment will decrease and at the same time the total payment will reduce.

Assume, the loan term is 25 years and the interest rate is 4.25% then the monthly payment will be

Total payment = 1,760.65 × 300 = $ 528,194.65

From above calculation we can see the total payment has decreased.

Therefore, if someone is unable to pay a higher amount monthly then the person can increase the loan term this will reduce the amount of interest paid on loan. Thus, by elongating the time period we can reduce the interest payment.

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