Home Loan Problems Solution for Set 5 Question 10
Click here to return to the index page for all Home Loan Problems
Solution to Question 10
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 expressed as a decimal (NOT A PERCENTAGE!), for the period of time over which payments are made.
P is the principal - this is the amount that Easton needs to borrow from the GreenBank.
N is the number of payment periods.
Since Easton has a 19 % deposit, the principal P for the loan is actually the price of the unit minus this deposit amount:
[an error occurred while processing this directive]P = 220000 - 0.01 * 19 * 220000 (we need the 0.01 to convert the deposit percentage into a decimal)
P = $178200
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 = 4.6 / 12 / 100
Monthly interest rate = 0.0038
We also need to calculate N, the total number of payments. Since payments occur every month, and Easton 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 = 0.0038 * 178200 / (1 - (1 + 0.0038)^(-240) )
A = $1137.03
Finally the solution: every month, Easton is going to have to fork out $1137.03 to the GreenBank to pay off his loan.