You are considering of purchasing a house. The house costs $500,000. You have $5

Question

You are considering of purchasing a house. The house costs $500,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 25-year mortgage that requires monthly payments and has an interest rate of 12% per annum compounded quarterly

.i. (5 marks) What will your monthly payment be if you sign up for this mortgage?

ii. (3.5 marks) How much does your first payment reduce the principal?  

iii. (1.5 marks) How much will you pay in interest in your first payment?  

Explanation / Answer

i. FV = 0, PV = 500,000-50,000, rate = 12%/4, N = 25*4

use PMT function in Excel to determine the quarterly payments

quarterly payments = 14,241.00

monthly payments = 14,241.00/3 = 4,747.00

ii) reduction in principal = 4,747.00

iii) interest = 0 (since interest is compounded in the first quarter only)

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