Question

Your boss, who never took an engineering economy course is buying a new house and needs your help in answering some questions. The loan amount will be in the "jumbo loan" category of $600,000 ant (1) 7.0% per year compounded monthly over 30 years, or (2) 6.624% compounded monthly over 15 years. there are no loan initiation fees, points paid, or other charges. prepayment, if desired, can be done without penalty.

a. What is the monthly payment for plan (1) and for plan (2)
b. What is the efective annual interest rate for plan (1) and for plan (2)
c. What is the total interest paid over the life of the loan for plan (1) and for plan (2)

Answer 1

The monthly payment for plan (1) is $3989.42 and for plan (2) is $5368.59. The effective annual interest rate for plan (1) is 7.23% and for plan (2) is 6.81%. The total interest paid over the life of the loan for plan (1) is $435,793.20 and for plan (2) is $274,346.23.

Step-by-step explanation:

In order to calculate the monthly payment and the total interest paid over the life of the loan, we can use the formula for calculating the monthly payment of a loan:

Monthly Payment = Loan Amount * (Interest Rate / 12) * ((1 + (Interest Rate / 12))^Number of Payments) / (((1 + (Interest Rate / 12))^Number of Payments) - 1)

For plan (1) with a loan amount of $600,000 and an interest rate of 7.0% per year compounded monthly over 30 years, the monthly payment is $3989.42 and the total interest paid over the life of the loan is $435,793.20.

For plan (2) with a loan amount of $600,000 and an interest rate of 6.624% compounded monthly over 15 years, the monthly payment is $5368.59 and the total interest paid over the life of the loan is $274,346.23.