Question

Part 1: Explain what the following variables represent and how changing each one affects the monthly payment amount: P, i, and t.

Part 2: Explain how changing each variable (P, i, and t) affects the total cost of principal and interest over the life of the loan.

Answer 1

Part 1 and 2: P represents principle, or the original cost of the mortgage. i represents the annualinterest rate (r/n), and t represents time. When you change the time it affects monthlypayments because theres either more or less time to pay off the mortgage. Having a longertime to pay off means you'll have lower monthly payments. When the interest rateincreases, the monthly payment increases. This is because the higher the interest rate, themore interest you're paying. Changing the principle means you either have more or lessmoney to pay off.P2: Increasing i will increase the total cost since more interest will be charged. Increasingtime means there's more periods for interest to gather so the total cost will increase.Shortening the time will decrease the total cost because there will be less time for interestto accumulate.