Home Loan Problems Solution for Set 4 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 Keenan needs to borrow from the Bank of the West.
N is the number of payment periods.
Because the deposit it 13 %, Keenan's principal amount will be the cost of the flat less this deposit amount:
[an error occurred while processing this directive]P = 560000 - 0.01 * 13 * 560000 (we need the 0.01 to convert the deposit percentage into a decimal)
P = $487200
We have a yearly interest rate, but we need the monthly interest rate, which we get by dividing by 12. We also need to divide the percentage rate by 100 to turn it into a decimal rate:
Monthly interest rate = 3.3 / 12 / 100
Monthly interest rate = 0.0027
We also need to calculate N, the total number of payments. The repayments happen every month. Keenan's loan runs for 30 years, so we can calculate how many months he'll be making payments for:
N = 12 * 30
N = 360
Armed with this information we can now fill in the numbers and then calculate the answer:
A = 0.0027 * 487200 / (1 - (1 + 0.0027)^(-360) )
A = $2133.70
Finally the solution: every month, Keenan is going to have to fork out $2133.70 to the Bank of the West to pay off his loan.