A. Set up an amortization schedule for a $30,000 loan to be repaid in equal installments at the end of each of the next 20 years at an interest rate of 10 percent. What is the annual payment?
B. Set up an amortization schedule for a $60,000 loan to be repaid in 20 equal annual installments at an interest rate of 10 percent. What is the annual payment?
C. Set up an amortization schedule for a $60,000 loan to be repaid in 20 equal annual installments at an interest rate of 20 percent. What is the annual payment?
D. Using the model that has worked for the first three problems, figure out the annual payments for a 20-year mortgage on a home where a buyer finances 90% of the home’s value (e.g., they pay 10% as a down payment) for a $185,000 home at an interest rate of 3.5%. Then, calculate what the annual payment would be if the buyer received an interest rate of 4.5%.
Finally, discuss which option you would choose if you were given the following choices and what might influence your decision:
Option 1: You can purchase the house at a 3.5% interest rate, but you would need to pay an additional $5,000 upfront for the bank to give you the rate. (NOTE--this is commonly called “buying points” in real estate) OR Option 2: You can purchase the house at a 4.5% interest rate and would not have to pay any additional money upfront.