Question

3. In 2005, Justin buys a condominium that sells for $195,000. The bank is requiring a minimum down payment of 15%. He obtains a 30-year mortgage at 4.2%/year interest What was his down payment? a) 195000 0.15-AI90 b) What is their monthly payments? c) If he pays the minimum payment each month, how much interest does he end up paying over the life of the mortgage? d) He decides to pay an extra $150 each month. How long will it take him to pay off the loan? How much money would he end up saving in interest by paying the extra $150/month? e)

Answer 1

Solution to a

Condominium value is $195000. Down payment is minimum of 15%.

So, down payment = $195000 x 15% = $ 29250

Solution to b

After down payment, balance left for payment would be $1,95,000 - $ 29,250 = $ 1,65,750

So, Justin has to pay 4.2% p.a. interest on balance payment. So, accordingly his annual payment would be (165750*4.2%) $6961.5 and monthly payment would be $ 580.125

Solution to c

If Justin pays minimum interest each month, then over the life of mortgage he will be paying total interest of =

$165750 x 4.2% x 30 = $ 2,08,845

Solution to d

If Justin decides to pay extra $150 each month, then to repay total balance of $165750, it would take ~92.08 yrs (i.e.$165750/ 150/ 12)

Solution to e

By paying the extra $150/ month, Justin would end up saving interest of $ 323996.40, which is explained below -

If no repayment would have been done, then total interest payment would be ~$641038.13 for the period 92 yrs and 1 month.

If $150 is being paid each month, then till the time loan is repaid total interest payment would be $317041.73.

Hence, the difference of above would be savings, which comes to 641038.13 - 317041.73 = $323996.40