Connect Assignment 15 Question 9 (of 10) 9 value: 100 points gage lenders base t

Question

Connect Assignment 15 Question 9 (of 10) 9 value: 100 points gage lenders base the mortgage interest rate they offer you on your credit rating. This makes it financially critical to maintain a credit score of 700 or higher. How much more interest would you pay on a $208,000 home if you put 25% down and financed the remaining with a 30-year mortgage at 50% interest compared to a 30-year mortgage at 3.5% interest? (Use Table 15.1). (Use 360 days a year. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) Excess interest References eBook & Resources Learning Objective: 15-01 (2) Utilize an amortization chart to compute monthly mortgage payments Worksheet

Explanation / Answer

We can use the present value of annuity formula to calculate monthly loan installments and Total Interest on both loans. Loan Type 1 PV of annuity = P*{[1-(1+r)^-n]/r} PV of annuity = loan amount = $208000 * 75% = $156000 P = Loan annuity = monthly loan installment = ? r = rate of interest per month = 5%/12 = 0.004167 n = no.of months = 30 years * 12 = 360 156000 = P*{[1-(1+0.004167)^-360]/0.004167} 156000 = P*186.28 P = 837.44 Monthly Loan installment = $837.44 Total Interest amount on this loan = ($837.44*360) - $156000 = $1,45,479 Loan Type 2 PV of annuity = P*{[1-(1+r)^-n]/r} PV of annuity = loan amount = $208000 * 75% = $156000 P = Loan annuity = monthly loan installment = ? r = rate of interest per month = 3.5%/12 = 0.002917 n = no.of months = 30 years * 12 = 360 156000 = P*{[1-(1+0.002917)^-360]/0.002917} 156000 = P*222.69 P = 700.51 Monthly Loan installment = $700.51 Total Interest amount on this loan = ($700.51*360) - $156000 = $96,184 Excess Interest = Total Interest on Loan Type 1 - Total Interest on Loan Type 2 = $1,45,479 - $96,184 = $49,295

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