The Smothers are looking at retiring and would like to be debt free when this st

Question

The Smothers are looking at retiring and would like to be debt free when this starts. They presently owe $225,000 on their home mortgage that has a rate of 4.25% APR with monthly compounding. a If they make payments of $3,000 monthly, how many years until they can retire (when the house loan is paid off). b If in the upcoming 5 years, they make $2,000 monthly payments, and then sell their house for $500,000, how much will they have to buy a home in a retirement development? (All taxes and fees should be ignored) The Smothers are looking at retiring and would like to be debt free when this starts. They presently owe $225,000 on their home mortgage that has a rate of 4.25% APR with monthly compounding. a If they make payments of $3,000 monthly, how many years until they can retire (when the house loan is paid off). b If in the upcoming 5 years, they make $2,000 monthly payments, and then sell their house for $500,000, how much will they have to buy a home in a retirement development? (All taxes and fees should be ignored)

Explanation / Answer

A) they will take around 7 years to retire the debt.

to calculate open a spreadsheet input the values of emi= 3000, rate=4.25%, n=12 and t=1 (this is for calculation purposes, this will later change as a result of goal seek). Input as follows

Then in another cell use the function PV and input the parameters as rate=4.25%/12, nper=12*1, pmt=-3000, fv=0 and press enter , you will get some value

then go to data tab and use what if analysis>>goal seek and set this cell to value 225000 by changing the cell in which we entered the value of t as 1, in the above table the last cell and hit enter , you will get the value of t as 7.277

B) second is similar only change use t as 5 and 2000 as EMI and FV as 500000, this will give you the answer as 296496

The debt that they owe is 225000

so the difference of 521496 can be used to buy the house

EMI 3000 rate 4.25% n 12 t 1

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