Financial Project Essay

491 words - 2 pages

Financial Project
Five (5) years ago, you bought a house for $171,000, with a down payment of $30,000, which meant you took out a loan for $141,000. Your interest rate was 5.75% fixed. You would like to pay more on your loan. You check your bank statement and find the following information:
Escrow payment $261.13
Principle and Interest payment $822.84
Total Payment $1,083.97
Current Loan Balance $130,794.68

Part 1
With your current loan, explain how much additional money you would need to add to your monthly payment to pay off your loan in 20 years instead of 25. Decide whether or not it would be reasonable to do this if you currently meet ...view middle of the document...

In this case it is $130,794.68. By knowing the future value, rate, time, and number of payments I can use the Amortization Formula to calculate what the new monthly payments would be.
P=m[(1-〖(1+i)〗^(-nt))/(r/n)] P=130,794.68 r=.0575 t=20 n=12

m=130,794.68((.0575)/12)/(1-(1+(.0575)/12)^(-(12)(20)) ) m=626.7245083/(1-(1.004791667)^(-240) )

m=626.7245083/(1-.3175075881) m=626.7245083/(1-.3175075881)

m=626.7245083/(.6824924119) m=626.7245083/(.6824924119)


By figuring out that the new 20 year monthly payment will be $918.29 I would subtract the current monthly payment, minus the escrow to see how much more I would need to spend per month. In this case I would take 918.29 – 822.24= 96.05. This means that I would need an additional $96.05 per month for a 20 year loan instead a 25 year loan.

In this case, it would not be the smart move to change to the 20 year loan because I would not have any money left over per month.

Part 2
Identify the highest interest rate you could refinance at in order to pay the current balance off in 20 years and determine the interest rate, to the nearest quarter point, that would require a monthly total payment that is less than your current total payment. The interest rate that you qualify for will depend, in part, on your credit rating. Also, refinancing costs you $2,000 up front in closing costs.

Explain your strategy for solving the problem.
Since I know the loan amount is $130,794.68

Present a step-by-step solution of the problem.


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