Question

Ian has the option of purchasing or renting a home. The purchase option requires a loan of $100,000 for a 20-year term at a 4.9% interest rate. The rental option requires a monthly rental payment of $725. Using the loan amortization formula, how much money does Ian save per month if he purchases the home instead of renting it?

Answer 1

The correct answer to the following question will be "70.56".

Explanation:

The given values are:

Loan requires, PV = $100,000

Years = 20

Number of months, n = 240

Rate interest = 4.90000%

Monthly rate, r = 0.408333%

Monthly rental payment = $725

As we know,

`PV=PMT* ((1)/(r))* [1-[(1)/((1+r)^n)]]`

On putting the values in the above formula, we get

⇒
`100000=PMT* ((1)/(0.004083333))* [1-((1)/((1+0.004083333^(240))))]`

⇒
`100000=PMT* 152.8014557`

⇒
`PMT=(100000)/(152.8014557)`

⇒
`PMT=654.44`

Now,

`Saving \ Per \ Month =Rent \ per \ month-PMT`

On putting the values, we get

⇒
`=725-654.44`

⇒
`=70.56`