Question

our boss, who never took an engineering economy course, is buying a new house and needs your help in answering some questions. The loan amount will be in the ‘‘jumbo loan’’ category of $600,000 at (1) 6% per year compounded monthly over 30 years, or (2) 5.625% compounded monthly over 15 years. There are no loan initiation fees, points paid, or other charges. Prepayment, if desired, can be done without penalty. Part a What is the monthly payment for plan (1)?

Answer 1

1) P = 600,000 , n = 12 * 30 = 360 , i = 6% / 12 = 0.5%

Monthly payment (A) = P(A/P, i, n)

                                  = 600,000(A/P, 0.5%, 360)

                                  = 600,000(0.006)

                                  = $3,600

Thus, the monthly payment for plan (1) is $3,600.

2) P = 600,000 , n = 12 * 15 = 180 , i = 5.625% / 12 = 0.46875%

Monthly payment (A) = P(A/P, i, n)

                                  = 600,000(A/P, 0.46875%, 180)

                                  = 600,000(0.00824)

                                  = $4,944

Thus, the monthly payment for plan (2) is $4,944.