Question

The Smiths were just approved for a 25 year mortgage at an 11% fixed rate. If they had not filed bankruptcy in the past, they could have gotten a rate of 7%. If their loan amount is $128,000, how much more per month will the Smiths be paying for their mortgage as a result of their bankruptcy? a. $349.86 b. $125,840.78 c. $904.68 d. $235.09

Answer 1

so your answer is A ;)

Answer 2

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.