Question

The bank is willing loan you money to purchase a home at 1% interest, compounded monthly. If you would like to buy a $300000 house, how much would your payments be each month be if you take out a:
10 year mortgage?
20 year mortgage?
30 year mortgage?
Do not round your answers!

Answer 1

300,000 / 100 = 3000 ( This is 1% of 300,000 ) ( This is also the interest every month)

now if you want a 10 year mortgage

you need to find out how much you will be paying back
so you take the value of the house and divide it by 10 years
to get the amount you will have to pay each year
then divide it by 12 to get how much you will have to pay every month
plus the interest you will have to pay every month

300,000 / 10 = 30,000 (This is how much you will have to pay per year)

30,000 / 12 = 2500

2500 per month are just repayments for the house but you need to also include the 1% interest which is 3000

so

2500 + 3000 = $5500 per month on a 10 year mortgage

now we leave the amount of interest the same on each of the mortgages but the price we have to pay back will be different as we have more time

so to work out how much we will have to pay back on a 20 year mortgage, take the value of the house divide it by 20 and then divide it by 12

300,000 / 20 = 15,000

15,000 / 12 = 1250

now you add this to the 1% interest which is 3000

1250 + 3000 = $4250 per month on a 20 year mortgage

and you do the same thing for the 30 year mortgage

300,000 / 30 = 10,000

10,000 / 12 = 833.3333333333333

833.3333333333333 + 3000 = $3833.3333333333333 every month on a 30 year mortgage

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