Question

Suppose that you would like to buy a home priced at $200,000. You plan to make a payment of 10% of the purchase price and pay 1.2% of the purchase price into an

escrow account annually.
a. Compute the total monthly payment and the total interest paid over the life of the loan for a 30-year mortgage at 4.8% annual interest.
b. Compute the total monthly payment and the total interest paid over the life of the loan for a 20-year mortgage at 4.8% annual interest.

Answer 1

see below

Explanation:

When you must do the same tedious calculation several times with different numbers, it is convenient to let a spreadsheet program do it for you. Here, the spreadsheet function PMT( ) computes the payment amount for the given interest rate, number of payments, and loan amount.

The loan amount is 90% of the purchase price.

The total interest over the life of the loan is the sum of the payments less the original loan amount.

The total monthly payment is the sum of the loan payment and the monthly escrow amount, which is 1/12 of the annual escrow amount.

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Here, we computed the total of payments using the unrounded "exact" value of each payment. We take this to be a better approximation of the total amount repaid, since the last payment always has an adjustment for any over- or under-payment due to rounding.