Question

The Harris family is buying a new 3,500-square-foot house in Muncie, Indiana, and will borrow $263,700 from Bank One at a rate of 5.420 percent for 15 years. What will be their monthly loan payment?

Answer 1

We can solve this question in MS-Excel using PMT function. Syntax of this function is "=-PMT(rate,nper,pv,[fv],[type]). rate stands for interest rate. The given interest rate of 5.420% is the annual rate. Since we would be making monthly payments and compounding will be monthly, we need to consider monthly rate i.e. 5.420%/12. nper is number of periods. While term of the loan is 15 years, we would be making 15*12 i.e. 180 payments. Hence nper = 180. pv means present value of the loan which is $263,700. We can ignore [FV] and place ',' in its place as FV stands for future value which is irrelevant for this question. type stands for timing of payment. Since we will be making payment at the end of the month, we will place 0 there. If we are assuming payment at the start of the month, we will put '1'. Lets use 0. Hence using these values monthly payments are calculated by the function as "=PMT(5.420%/12, 180,263700,,0). The result would be $2,143.47. Hence monthly payment would be $2,143.47.

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