Question

Five (5) years ago, you bought a house for $171,000, with a down payment of $30,000, which meant you took out a loan for $141,000. Your interest rate was 5.75% fixed. You would like to pay more on your loan. You check your bank statement and find the following information:
Escrow payment: $261.13
Principle and Interest payment: $822.84
Total Payment: $1,083.97
Current Loan Balance $130,794.68
With your current loan, explain how much additional money you would need to add to your monthly payment to pay off your loan in 20 years instead of 25.

Answer 1

can you use a financial calculator?

Answer 2

it doesnt say we cant

Answer 3

ok then set int rate to 5.75/12
set num months to (20*12) or 240
set present value (PV) to loan balance 130,794.68
compute monthly payment

the difference between that number and current payment (822.84) is extra needed to pay off in 20 yrs

Answer 4

so basically it would look like this: .0575/12 x 240 x 130794.68?

Answer 5

is that multiplication?

Answer 6

that wouldnt be right lol im confused

Answer 7

yes

Answer 8

have you ever used a financial calculator

Answer 9

yes

Answer 10

im guesing you are taking a finance class right

ok then when you know you input variables and it will calculate unknown parameters such as num months, int rate, monthly payment

Answer 11

yes and this class is called algebra with applications

Answer 12

ok so i get roughly around $96 dollars extra a month

Answer 13

ok yeah they defiantly just want you to know how to use a calculator to help make good financial decisions

the teacher should have gone over how to use the calculator

Answer 14

yep .. i just checked and got 95.44

Answer 15

just out of curiousity what formula would that be using? And how would you go about setting that up on paper?

Answer 16

it uses a geometric series and formula for sum of geometric series
i dont think you are expected to do this by hand

Answer 17

alright can i ask one last question to the problem?

Answer 18

sure

Answer 19

Identify the highest interest rate you could refinance at in order to pay the current balance off in 20 years and determine the interest rate, to the nearest quarter point, that would require a monthly total payment that is less than your current total payment. The interest rate that you qualify for will depend, in part, on your credit rating. Also, refinancing costs you $2,000 up front in closing costs.

Answer 20

that is the second part to the question.

Answer 21

is that 2 separate questions?

Answer 22

nope its the second part to my original post

Answer 23

ok so they want highest int rate to pay off balance or do they want int rate requiring smaller payment?

Answer 24

they want the highest int rate to pay off the balance in 20 years that requires a monthly payment less than the monthly payment now

Answer 25

hmm how much less? my guess is just find highest int rate for current payment......if payments are less then int rate would have to be lower to still pay off in 20 yrs

Answer 26

good point

Answer 27

set payment to 822.84
set N = 240
set present value (loan balance) to 132,794.68
you have to add the 2,000 for refinancing fee

calculate int rate (this will give monthly rate so times by 12)

Answer 28

wow your awesome lol.

Answer 29

haha your welcome

Answer 30

i can see you were great in math

Answer 31

yep that was my thing....didnt like writing papers

Answer 32

anyway moral of story is if you can refinance at the lower int rate it is better than paying the extra 96 a month to pay off loan in 20 yrs

Answer 33

thats why so many people refinance all the time... and banks make profit off all those fees :)

Answer 34

what int rate did you get just to double check my work?

Answer 35

about 4.25%

Answer 36

thanks so much you have been a big help!

Answer 37

yw