Larry Davis borrows $74,000 at 10 percent interest toward the purchase of a home

Question

Larry Davis borrows $74,000 at 10 percent interest toward the purchase of a home. His mortgage is for 20 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.) (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Annual payments $ b. How much interest will he pay over the life of the loan? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Amount of interest $ c. How much should he be willing to pay to get out of a 10 percent mortgage and into a 8 percent mortgage with 20 years remaining on the mortgage? Assume current interest rates are 8 percent. Carefully consider the time value of money. Disregard taxes. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Explanation / Answer

  Solution:

Appendix D

     =$74000 /8.5136

    =$8691.98

            *20                years

$173,839.60             total payments

- 74000             repayment of principal

$99,839.60           total interest paid

A = PV A / PVIFA (8%,20 periods)

     =$74000 /9.818

     =$7537.10

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