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24 December, 08:58

You want to buy a house and will need to borrow $255,000. The interest rate on your loan is 5.89 percent compounded monthly and the loan is for 25 years. What are your monthly mortgage payments

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  1. 24 December, 09:18
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    Answer: $1,626

    Explanation:

    A Mortgage payment is a type of annuity so the Present Value of an Annuity formula can be used to calculate this.

    The Period is 12 months so adjustments need to be made to the interest rate and the period.

    Period.

    = 25 years * 12 months

    = 300

    Interest Rate

    = 5.89/12

    = 0.4908%

    Present Value of the Annuity is the mortgage amount of $255,000

    Present Value of Annuity is,

    P = PMT (1 - (1 + r) ^-n) / r

    Where,

    P = Present Value

    PMT = payment per period

    r = Interest rate

    n = no. of periods

    255,000 = PMT (1 - (1+0.4908%) ^-³⁰⁰) / 0.4908%

    255,000 = 156.8456 PMT

    PMT = 255,000/156.8456

    = $1,625.80

    = $1,626
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