For this you will have to search for your dream house, calculate the down paymen
ID: 1174841 • Letter: F
Question
For this you will have to search for your dream house, calculate the down payment, and the monthly payments for a 30 and 15 years fixed loan. You will use the loan payment formula to determine your monthly payments for a 30-year fixed loan with an APR of 3.75% and for a 15-years fix loan with an APR of 2.97% with a down payment of 5%. You will make a decision on which loan you would take and provide reasons for your choice based on comparing the monthly payment amounts and the total interest paid amounts.
Explanation / Answer
Let us assume that the cost of the dream house is $1,000,000
Downpayment = 5%* $1,000,000 = $50,000
Financing needed = $1,000,000-$50,000 = $950,000
Monthly payment for 30-year fixed loan with an APR of 3.75%:
Rate per period = 3.75%/12 = 0.3125%
Number of periods = 30*12 = 360
PV = $950,000
FV = 0
Using PMT function in excel,
Monthly payment =PMT(3.75%/12,360,-950000,0) = $4399.60
Total payment over 30 years = 360*$4399.60 = $1,583,856
Interest paid = $1,583,856 - $950,000 = $633,856
Monthly payment for 15-year fixed loan with an APR of 2.97%:
Rate per period = 2.97%/12
Number of periods = 15*12 = 180
PV = $950,000
FV = 0
Using PMT function in excel,
Monthly payment =PMT(2.97%/12,180,-950000,0) = $6546.83
Total payment over 15 years = 180*$6546.83 = $1,178,429.4
Interest paid = $1,178,429.4 - $950,000 = $228,429.4
Given the lower interest in case of 15 year loan as compared to 30 year loan, one should take the 15 Year loan.