Larry Davis borrows $76,000 at 12 percent interest toward the purchase of a home
ID: 2657838 • Letter: L
Question
Larry Davis borrows $76,000 at 12 percent interest toward the purchase of a home. His mortgage is for 30 years. Use Appendix D for an approximate answer, but calculate your final answer using the formula and financial 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.)
b. How much interest will he pay over the life of the loan?
c. How much should he be willing to pay to get out of a 12 percent mortgage and into a 10 percent mortgage with 30 years remaining on the mortgage? Assume current interest rates are 10 percent. Carefully consider the time value of money. Disregard taxes.
Explanation / Answer
a. PV = 76,000 FV = 0, N = 30, rate = 12%
use PMT function in Excel
annual payments = 9,434.92
b. interest = 9,434.92*30 - 76,000 = 207,047.54
c. N = 30, FV = 0, rate = 10%, PMT = 9,434.92
use PV function in Excel to determine the present value of a. using 10% discount rate
Present value = 88,942.16
amount he can pay = 88,942.16 - 76,000 = 12,942.16
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