2) Dan takes a variable rate loan for $15,000. The interest rates charged change

Question

2) Dan takes a variable rate loan for $15,000. The interest rates charged change annually and the rates charged are as follows: 11 = 3.5% 12-4.5% i3 = 5% ,24.25% . Find Dan's payments and the total amount of interest that he pays in each of the following scenarios. In each case assume that he makes annual payments with the first payment one year after the date that he takes the loan. a) He makes payments equal to the interest due plus S5000 principal. b) He pays $6000 each year for as long as required plus a smaller final payment as required c) He pays $5000 each year for as long as required plus a smaller final payment as required. d) How much interest would he pay if he instead uses a three year amortization using a locked in interest rate of 4.5%?

Explanation / Answer

Interest payment in each scenario a. Year Begaining Balance Interest rate Interest payment Principal payment Total Annual payment Closing balance 1 $15,000 3.50% $525 $5,000 $5,525 $10,000 2 $10,000 4.50% $450 $5,000 $5,450 $5,000 3 $5,000 5.00% $250 $5,000 $5,250 $0 Total Interest paid $1,225 b. Year Begaining Balance Interest rate Interest payment Principal payment Total Annual payment Closing balance 1 $15,000 3.50% $525 $5,475 $6,000 $9,525 2 $9,525 4.50% $429 $5,571 $6,000 $3,954 3 $3,954 5.00% $198 $3,954 $4,151 $0 Total Interest paid $1,151 c. Year Begaining Balance Interest rate Interest payment Principal payment Total Annual payment Closing balance 1 $15,000 3.50% $525 $4,475 $5,000 $10,525 2 $10,525 4.50% $474 $4,526 $5,000 $5,999 3 $5,999 5.00% $300 $4,700 $5,000 $1,299 4 $1,299 4.25% $65 $1,299 $1,363 $0 Total Interest paid $1,299 d. Year Begaining Balance Interest rate Interest payment Principal payment Total Annual payment Closing balance 1 $15,000 4.50% $525 $4,932 $5,457 $10,068 2 $10,068 4.50% $453 $5,004 $5,457 $5,065 3 $5,065 4.50% $253 $5,065 $5,457 $0 Total Interest paid $1,231

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