Home Loan Problems Solution for Set 10 Question 8
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Solution to Question 8
For this type of question, you need this following equation:
A = i * P / (1 - (1 + i)^(-N) )
A is the payment Amount each month.
i is the interest rate as a decimal, not a percentage, for the period of time at which payments are made.
P is the principal - this is the amount that Cedric needs to borrow from the First Federal Bank of the Midwest.
How many payment periods there are is represented by N.
Since Cedric has a 25 % deposit, the principal P for the loan is actually the price of the one bedroom flat minus this deposit amount:
[an error occurred while processing this directive]P = 180000 - 0.01 * 25 * 180000 (we need the 0.01 to convert the deposit percentage into a decimal)
P = $135000
We have a yearly interest rate, but we need the monthly interest rate, which we get by dividing by 12. The percentage rate needs to be divided by 100 to convert it to a decimal rate:
Monthly interest rate = 6.2 / 12 / 100
Monthly interest rate = 0.0052
We also need to calculate N, the total number of payments. Since payments occur every month, and Cedric has a 10 year loan:
N = 12 * 10
N = 120
Armed with this information we can now fill in the numbers and then calculate the answer:
A = 0.0052 * 135000 / (1 - (1 + 0.0052)^(-120) )
A = $1512.37
So every month, Cedric will have to pay $1512.37 to the First Federal Bank of the Midwest.