Suppose the interest rate on a fixed-rate, 30-year mortgage is 6.5%. Lex can afford to make payments of $1100/month.
i) What is maximum mortgage Lex can afford??
ii) While Lex ponders buying a house, the interest rate falls to 5.5%. Lex can still only afford to make payments of $1100/month. What is maximum mortgage Lex can afford now?
Present Value of Loan:
Loans are often structured in a way that requires periodic payments of the same amount over the life of the loan. These payments are calculated such that the present value of the annuity of payments, discounted at the interest rate, is equal to the principal of the loan.
Answer and Explanation:
We can use the following formula to compute the present value of an annuity with M periodic payments, r interest rate, and T payments:
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from Remedial Algebra IChapter 25 / Lesson 8