Question

Use PMT=

nearest dollar.
-nt
to determine the regular payment amount, rounded to the
The price of a home is $210,000. The bank requires a 15% down payment and one
point at the time of closing. The cost of the home is financed with a 30-year fixed-
rate mortgage at 6.5%.
a. Find the required down payment.
b. Find the amount of the mortgage.
c. How much must be paid for the one point at closing?
d. Find the total cost of interest over 30 years, to the nearest dollar.
B)
OA) a. down payment: $31,500
b. amount of mortgage: $178,500
c. points paid at closing: $2100
d. total cost of interest over 30 years: $196,167
a. down payment: $31,500
b. amount of mortgage: $178,500
c. points paid at closing: $1785
d. total cost of interest ver 30 years: $227,667
Oc) a. down payment: $31,500
b. amount of mortgage: $178,500
c. points paid at closing: $2100
d. total cost of interest over 30 years: $227,667
OD) a. down payment: $31,500
b. amount of mortgage: $178,500
c. points paid at closing: $1785
d. total cost of interest over 30 years: $406,167

Answer 1

B

• a. down payment: $31,500
• b. amount of mortgage: $178,500
• c. points paid at closing: $1785
• d. total cost of interest over 30 years: $227,667

Explanation:

You want to know the 15% down payment, the mortgage amount, the value of 1 point, and the total interest cost for a 6.5% 30 year loan on a $210,000 home.

Look at the Answer Choices

The answer choices all have the down payment as $31,500 and the loan value as $178,500. A "point" is one percent of the loan value (not the home value), so ...

1 point = 0.01 × $178,500 = $1785 . . . . . . eliminates choices A and C

The difference between choices B and D is in the value of the interest paid. Your experience with 30-year loans in this interest rate range tells you that the interest paid is between 1 and 2 times the loan value. That is, the chice $227,667 is more likely correct than the choice $406,167.

Comparing these two numbers, we see they differ by 178,500, which is the value of the loan. That is, we can guess that 406,167 is the total amount repaid, not just the interest.

Answer choice B is the only one that makes sense.

Work the problem

If you like, you can work the problem.

down payment = 15% × $210,000 = $31,500

loan amount = $210,000 -31,500 = $178,500

one point = 0.01 × $178,500 = $1785

The monthly payment is found using the amortization formula:

A = P(r/12)/(1 -(1 +r/12)^(-12t))

A = 178500(0.065/12)/(1 -(1 +0.065/12)^(-12·30)) ≈ 1128.24

The monthly payment amount is about $1128.

So, the total repaid is 360 payments of $1128.24, or $406,167.

The interest paid is this amount less the principal:

interest paid = $406,167 -178,500 = $227,667