Midterm Loan Question

7% No points, a standard US mortgage (30 years)

Consider a $120,000.00 loan. What would the monthly payments be if you took the
loan with no points?

(a) $ 798.36
(b) $ 805.86
(c) $ 335.28
(d) None of the above

This is an example of an amortizing mortgage. That is, this is a loan that is to be repaid in equal periodic amounts. In order to calculate the monthly payments on this loan, it’s important to calculate the effective interest rate first.

1)
7% interest rate compounded monthly:
EIR=0.07/12
≈0.00583

2)
P=$120,000
I = 0.583%
N=12months×30years
=360 (months)

Using the monthly payment formula we get:

A=$120,000(A/P, i=0.583%, 360)
=$798.3763

The correct answer a.

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