Ruby has purchased a new home that needs repair. She has gained approval for a h
ID: 2773518 • Letter: R
Question
Ruby has purchased a new home that needs repair. She has gained approval for a home improvement line-of-credit for $100,000 that she will use to fix up the house over three years. Interest on line-of-credit loans is only incurred on the amount borrowed, not the limit of $100,000. She estimates that she will borrow $2,500 at the beginning of each month for three years starting today. At the end of the three years she will pay back the loan with equal payments over the following ten years with end of month payments. If the interest rate on the loan is 4% NAR with monthly compounding, what will be her payment at the end of each month during the ten years in which she pays off the loan.Any one can guide in the right direction?
Explanation / Answer
FORMULA FOR COMPOUNDING INTEREST IS
AMOUNT= PRINCIPAL [1+(RATE%/12)]^36
WHERE, 36 IS NO OF YEARS * MONTHS ie 12*3
THIS 36 WILL DECREASE BY 1 EVERY TIME TILL WE REACH 0
SO ANSWER CAME OUT TO BE 2500[1+(0.4/12)]^36 AND SO ON....
=> 98552.01 IS AMOUNT AFTER 3 YEARS OF BORROWING ALONG WITH COMPOUND INTEREST
NOW EQUAL PAYMENT IN FOLLOWING 10YEARS
=> [98552.01/(12M*10Y)]
=> 821.27
ASSUMING NO INTEREST TO BE PAID AFTER 10 YEARS, AS NOT MENTIONED IN QUESTION
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