Question

1. Mortgage Choice: You have just graduated and accepted one of many job offers. You estimate that you can afford a monthly mortgage payment of $1300 per month (this is principal AND interest). How big of a mortgage loan can you take on if you are given:

1. a 4.5% annual interest rate over 15 years?

2. a 5.5% annual interest rate over 30 years?

Answer 1

a)

Present Value Of An Annuity

= C*[1-(1+i)^-n]/i]

Where,

C= Cash Flow per period

i = interest rate per period =4.5%/12 =0.375%

n=number of period =15*12 =180

= $1300[ 1-(1+0.00375)^-180 /0.00375]

= $1300[ 1-(1.00375)^-180 /0.00375]

= $1300[ (0.4902) ] /0.00375

= $1,69,936.13

b)

Present Value Of An Annuity

= C*[1-(1+i)^-n]/i]

Where,

C= Cash Flow per period

i = interest rate per period =5.5%/12 =0.458333%

n=number of period =30*12 =360

= $1300[ 1-(1+0.00458333)^-360 /0.00458333]

= $1300[ 1-(1.00458333)^-360 /0.00458333]

= $1300[ (0.8072) ] /0.00458333

= $2,28,958.39