Home Loan Problems Solution for Set 3 Question 8
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Solution to Question 8
The equation you need to use is as follows:
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.
The amount that Julio needs to borrow from the PlainsCapital Bank is the principal P.
How many payment periods there are is represented by N.
Because the deposit it 30 %, Julio's principal amount will be the cost of the flat less this deposit amount:
[an error occurred while processing this directive]P = 220000 - 0.01 * 30 * 220000 (we need the 0.01 to convert the deposit percentage into a decimal)
P = $154000
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 = 7.1 / 12 / 100
Monthly interest rate = 0.0059
We also need to calculate N, the total number of payments. Since payments occur every month, and Julio has a 20 year loan:
N = 12 * 20
N = 240
Armed with this information we can now fill in the numbers and then calculate the answer:
A = 0.0059 * 154000 / (1 - (1 + 0.0059)^(-240) )
A = $1203.22
So every month, Julio will have to pay $1203.22 to the PlainsCapital Bank.