Home Loan Problems Solution for Set 2 Question 9
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Solution to Question 9
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 Kaleb needs to borrow from the Webster Bank.
N is the number of payment periods.
Because the deposit it 18 %, Kaleb's principal amount will be the cost of the two bedroom unit less this deposit amount:
[an error occurred while processing this directive]P = 380000 - 0.01 * 18 * 380000 (we need the 0.01 to convert the deposit percentage into a decimal)
P = $311600
We need to convert the yearly interest rate into something we can use in this question - we need a monthly interest rate, so we need to divide by 12. The percentage rate needs to be divided by 100 to convert it to a decimal rate:
Monthly interest rate = 11.6 / 12 / 100
Monthly interest rate = 0.0097
We also need to calculate N, the total number of payments. Since payments occur every month, and Kaleb 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 = 0.0097 * 311600 / (1 - (1 + 0.0097)^(-120) )
A = $4398.80
So every month, Kaleb will have to pay $4398.80 to the Webster Bank.