Question
In: Finance
1. You are considering purchasing a house for $225,000. Do a three-month loan amortization and calculate...
1. You are considering purchasing a house for $225,000. Do a three-month loan amortization and calculate the total finance charge. Assume a 20 % down payment.
Do a three-month loan amortization table on a 20 year loan at a 5.25% rate with one point paid.
Beginning Bal. Payment Principal Interest Ending Bal.
2. Calculate the total finance charge for this loan.
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Solutions
Expert Solution
| Answer 1 | |||||||||
| Three-month loan amortization table | |||||||||
| Month | Beginning bal. | Payment | Principal | Interest | Ending bal. | ||||
| a | b | c | d = c-e | e = (b x 5%)/12 | f = b-d | ||||
| 1 | $180,000.00 | $1,187.92 | $437.92 | $750.00 | $179,562.08 | ||||
| 2 | $179,562.08 | $1,187.92 | $439.74 | $748.18 | $179,122.34 | ||||
| 3 | $179,122.34 | $1,187.92 | $441.58 | $746.34 | $178,680.76 | ||||
| Answer 2 | |||||||||
| Total Finance charge on loan = (Loan tenure in months x Monthly payment) - Original Loan amount | |||||||||
| Total Finance charge on loan = (240 months x $1187.92) = $180000 = $1,05,100.88 | |||||||||
| Working | |||||||||
| Calculation of monthly payment on loan | |||||||||
| We can use the present value of annuity formula to calculate the monthly loan payment. | |||||||||
| Present value of annuity = P x {[1 - (1+r)^-n]/r} | |||||||||
| Present value of annuity = Loan amount = Purchase cost of house - down payment = $225,000 - ($225,000 x 20%) = $1,80,000 | |||||||||
| P = monthly payment = ? | |||||||||
| r = interest rate per month = 5.00%/12 = 0.004167 | |||||||||
| n = number of monthly payments = 20 years x 12 = 240 | |||||||||
| 180000 = P x {[1 - (1+0.004167)^-240]/0.004167} | |||||||||
| 180000 = P x 151.53 | |||||||||
| P = 1187.92 | |||||||||
| Monthly payment = $1,187.92 | |||||||||
| Note : Interest rate 5.25% with one point paid means effective interest rate would be 5%. | |||||||||
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