Annuity Problem Case Study Solution

Submitted By kurtsplan
Words: 348
Pages: 2
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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 your monthly expenses with less than $100 left over.

• (a) Explain your strategy for solving the problem.

You are given the current outstanding balance, so simply use the annuity formula to solve for the payment with 20 years and r = 5.75%

• (b) Present a step-by-step solution of the problem.

130,794.68 = P[ 1 - (1+0.0575/12)^(-12*20)] / (0.0575/12) , now solve for P ...

P = 918.29 [principal + interest, excluding escrow]

The current p & i = 822.84 per month

Increase in monthly payment = 918.29 - 822.84 = $95.45

• (c) Clearly state your answer to Part 1. What is your decision?

Since you currently meet your monthly expenses with less than $100 left over, this additional mortgage payment will lower your extra spending money to zero or possibly a deficit. DON'T DO IT! You need that extra money to put away for a rainy day!

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
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