Question

Larry Davis borrows $75,000 at 11 percent interest toward the purchase of a home. His mortgage is for 25 years. Use Appendix D for an approximate answer, but calolate your final answer using the formula and francial calculator methods. a. How much will his annual payments be? (Although home payments are usually on a monthly basis, we shal do our analysis on an annual basis for ease of computation. We will get a reasonably accurate answer.) (Do not round Intermediate calculations. Round your final answer to 2 decimal places) b. How much interest wil he pay over the life of the loan? (Do not c. How much should he be willing to pay to get out of a 11 percent mortgage and into a 9 percent mortgage with 25 years remaining on the mortgage? Assume current interest rates are percent. Carefully consider the time value of money Disregard taxes (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

Larry Davis borrows $75,000 at 11 percent interest toward the purchase of a home. His mortgage is for 25 years. Use Apendix D for an approximate answer, but calculate your final answer using the formula and Enancial calculator methods. a. How much will his annual payments be? (Although home payments are usually on a monthly basis, we shall do our analysis on an annual basis for ease of computation. We will get a reasonably accurate answer.) (Do not round Intermediate calculations. Round your final answer to 2 decimal places) Annual payments b. How much interest will be pay over the ide of the loan? Do not found intermediate o not found intermediate calculations. Round your final answer to 2 decimal places Annual payments c. How much should he be willing to pay to get out of a 11 percent mortgage and into a 9 percent mortgage with 25 years remaining on the mortgage? Assume current interest rates are percent. Carefully consider the time value of money. Disregard taxes. Do not round intermediate calculations. Round your final answer to 2 decimal places.)

(a) Using formula

P=C1/r-1/(r(1+r)

Here P = $75,000

r = 11%

t = 25 years

Putting all values

C = $8,905.52

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(b) Total Money paid during life of Loan = CxT

C = $8,905.52

T= 25 years

Total Paid = $222,637.95

Money paid in Interest = Total Paid - Principle

$222,637.95 - $75,000 = $147,637.95

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(c) If Larry gets loan at 9%

Let say he makes the same repayments as he is doing at 11% then

using

P=C1/r-1/(r(1+r)

C = $8,905.52

r = 9%

t = 25 years

using it

P = $87,475.18

So if Loan was $87,475.18 then he has to make repayment of $8,905.52 (75,000@11%, 25 yrs)

He should be willing to pay anything which makes his Loan + fee < $87,475.18

So, $75,000 + fee < $87,475.18

fee <$12,475.18

He should be willing to pay till $12,475.18

Please comment if you need and further help and give thumps up if answer is satisfactory

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