 # Case Study Alabama Home

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1. According to Homes.com, a Hoover, Alabama home is priced at \$195, 000. If a person was to pay a 20% down payment of \$39,000, they will only be required to pay \$1,009 per month (745 for principal and interest, 68 for insurance and 195 for taxes). This is a 30 year fixed mortgage at a rate of 4%. a. How much interest will the purchaser of this home pay over the life of the loan, being that the loan is a 30 year fixed mortgage that will require the purchaser to pay \$1009 per month? (\$745 of this payment represents principal and interest, the rest of the amounts used to calculate payments include insurance and tax) Solution: This problem requires the use of the Finance Charge formula: The Finance charge is equivalent to the total of all monthly…show more content…
This mortgage is 30 years, and 30 years multiplied by 12 months is equivalent to 360. 360 multiplied by the monthly paymenst of \$745 is equivalent to \$268,200 or the total of all monthly payments. The owner of this house paid a downpayment of 20% on the price (\$195,000) fo the home, which is \$39,000. \$195,000 – 39,000 is equivalent to \$156,000 or the amount financed. The Finance Charge or Interest is equivalent to the Total of all monthly payments (\$268,000) – The amount financed (\$156,000) which is equivalent to \$112,000. b. What would the monthly payments on this home be as it relates to principal and interest alone, if the mortgage was a 25 year mortgage as opposed to being a 30 year mortgage? All other factors such as the 4% rate, the 20% down payment, etc. will remain the same. The total amount financed is \$156,000. Solution: This problem requies the use of the monthly payment formula. PMT is equivalent to present value times interest, all, divided by 1 minus the fraction of 1 divided by (1+i) raised to the number of payment periods. PMT = Present value (\$156,000) x Interest (4% / 12) or .33% or .0033. All divided by 1 – 1 divided by (1+.0033)^300 = \$823.43 The monthly payments as it relates to principal and interst is