Home Loan Problems Solution for Set 9 Question 3
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Solution to Question 3
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 Demarcus needs to borrow from the Superior Bank is the principal P.
How many payment periods there are is represented by N.
Since Demarcus has a 26 % deposit, the principal P for the loan is actually the price of the granny flat minus this deposit amount:
[an error occurred while processing this directive]P = 520000 - 0.01 * 26 * 520000 (we need the 0.01 to convert the deposit percentage into a decimal)
P = $384800
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 = 9.3 / 12 / 100
Monthly interest rate = 0.0077
We also need to calculate N, the total number of payments. Since payments occur every month, and Demarcus has a 25 year loan:
N = 12 * 25
N = 300
Armed with this information we can now fill in the numbers and then calculate the answer:
A = 0.0077 * 384800 / (1 - (1 + 0.0077)^(-300) )
A = $3308.64
So every month, Demarcus will have to pay $3308.64 to the Superior Bank.