Question

The seller offers to take back a second mortgage of $25,000 at a simple interest rate of 4.5%. The loan is amortized over 10 years. How much is the buyer paying on the second?

Answer 1

To determine the buyer's monthly payment for a $25,000 second mortgage at a 4.5% interest rate over 10 years, use the loan amortization formula involving the principal amount, the monthly interest rate, and the total number of payments.

Step-by-step explanation:

To calculate how much the buyer would be paying on the second mortgage the seller offers, which is a $25,000 loan at a 4.5% simple interest rate amortized over 10 years, we apply the formula for the monthly payment of an amortized loan:

Monthly Payment = P * r * (1 + r)^n / ((1 + r)^n - 1)

Where:

P = principal amount ($25,000)
r = monthly interest rate (4.5% / 12 months = 0.00375)
n = total number of payments (10 years * 12 months = 120)

First, we calculate (1 + r)^n:
(1 + 0.00375)^120

Then, we plug these values and solve for the monthly payment:
Monthly Payment = 25000 * 0.00375 * (1 + 0.00375)^120 / ((1 + 0.00375)^120 - 1)

After calculating the above expression, we get the monthly payment the buyer has to make to repay the second mortgage over 10 years.