To answer the problem, the amortization formula will be of great help. The formula is as follows:
A = P × ((r(1+r)ⁿ)/((1+r)ⁿ-1))
A = is the amortization
P = is the principal
r = is the rate
n = is the period
1. Compute for the amortization using the 11% interest rate.
A = $128000 × ((0.11(1.11)²⁵)/((1.11)²⁵-1))
= $1,254.54
*if solve manually, the answer should be divided by 12 because it was on a monthly basis.
2. Compute for the amortization using the 7% interest rate.
A = $128000 × ((0.07(1.07)²⁵)/((1.07)²⁵-1))
= $904.68
*if solve manually, the answer should be divided by 12 because it was on a monthly basis.
3. Thus, the increase in monthly amortization as a result of higher interest rate is $349.86.