You are borrowing $215,000 to purchase your new home. The mortgage offers a 6% f
ID: 2809013 • Letter: Y
Question
You are borrowing $215,000 to purchase your new home. The mortgage offers a 6% fixed annual rate of interest and the balance is amortized over a 30-year period. You do not have to pay any points or origiantion fees, but a penalty equal to 3% of the remaining loan balance is charged if the loan is repaid in full at any time within the first five years. What is the scheduled monthly payment? What is the remaining balance of the loan after making payments for 4 years? What is the total amount (balance plus penalty) that must be paid to the lender if you pay off the remaining balance of the loan after making payments for 4 years? If you pay off the remaining balance of the loan after making payments for 7 years, what is the effective cost of borrowing?
Explanation / Answer
PV = -215,000
FV = 0
rate = 6%/12
N = 360
use PMT function in Excel
1. monthly payment = 1289.03
2. put N = 48 and use FV function in Excel
value of loan after 4 years = 203,421.24
3. amount to be paid off after 4 years = 1.03*203,421.24 = 209,523.88
4. PV = 215,000, PMT = -1289.03, FV = 209,523.83, N = 48
use rate function in Excel and multiply by 12
effective cost of borrowing = 6.64%
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