Larry Davis borrows $75,000 at 11 percent interest toward the purchase of a home

Question

Larry Davis borrows $75,000 at 11 percent interest toward the purchase of a home. His mortgage is for 25 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.)

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.)

c. How much should he be willing to pay to get out of a 11 percent mortgage and into a 9 percent mortgage with 25 years remaining on the mortgage? Assume current interest rates are 9 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

a. FV = 0

PV = 75000

rate = 11%

N = 25

use PMT function in Excel

a. annual payments = 8,905.52

b. interest paid = 8,905.52*25 - 75,000 = 147,637.95

c. N = 25

PMT = 8,905.52

FV = 0

rate = 9%

calculate PV using PV function in Excel

PV = 87,475.16

amount willing to be paid = 87,475.16 - 75,000 = 12,475.16

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