Jade Pinkowitz has decided to purchase a home and move out o

Jade Pinkowitz has decided to purchase a home and move out of her parent’s house so she doesn’t end up living in the basement forever and driving her parents crazy and…sorry. Jade is paying $300,000 for the house and with her $50,000 down payment, she will borrow the remaining $250,000. Exhibit 1 shows part of the Truth in Lending Act (TILA) Real Estate Settlement Procedures form that she receives outlining her loan. The loan is a 30 year fixed-rate loan at a rate of 3.6% APR, compounded monthly. It has no prepayment penalty so Jade can pay off the full balance of the loan at any time. The loan also has no balloon payment so she has the option of making the full 30 years of payments.

Exhibit 1: TILA RESPA form excerpt

a. In her FIRST payment of $1,136.61, how much money in interest does Jade pay?

b. Assume Jade makes the monthly payments as required by the loan. At the end of 4 years Jade wants to pay off the entire outstanding mortgage (remember there is no pre-payment penalty for doing this so if she has the money she can do it). How much money will she need to pay-off the remaining loan ?

c. Suppose that Jade’s parents decide they will not help her with the down payment and she needs to borrow the full $300,000 cost of the home at the same interest rate, what would her new monthly mortgage payment be?

Save this Loan Estimate to compare with your Closing Disclosure Loan Estimate LOAN TERM 30 years PURPOSE Purchase PRODUCTFixed Rate LOAN TYPE ?Conventional FHA VA LOAN ID # G33K4L1F3 RATE LOCK NO ERES, until 10/31/2016 DATE ISSUED 10/15/2016 APPLICANTS Jade Pinkowitz 123 Nathan Lane Broderick, MT 76423 PROPERTY Does it really matter? SALE PRICE $300,000 Before closing, your interest rate, points, and lender credits can change unless you lock the interest rate. All other estimated closing costs expire orn Loan Terms Loan Amount Interest Rate Can this amount increase after closing? $250,000 NO 3. 60% NO NO Monthly Principal & Interest See Projected Payments below for your Estimated Total Monthly Payment $1,136.61 Does the loan have these features? Prepayment Penalty NO Balloon Payment NO

Solution

Part a)

The total amount of interest in the first payment is calculated as below:

Total Amount of Interest in First Payment = Total Amount Borrowed*Interest Rate*1/12 = 250,000*3.6%*1/12 = $750

_____

Part b)

Assuming the loan balance to be paid is to be calculated together with the interest amount, the total amount of money (including interest) that Jade will be required to pay at the end of 4 years is calculated as below:

Total Amount to be Paid Over a Period of 30 Years = Amount of Monthly Payment*Total Number of Years*Number of Months in Year = 1,136.61*30*12 = $409,179.60

Total Amount Paid Upto 4 Years = Amount of Monthly Payment*4*Number of Months in Year = 1,136.61*4*12 = $54,557.28

Net Amount to be Paid at the End of 4 Years = Total Amount to be Paid Over a Period of 30 Years - Total Amount Paid Upto 4 Years = 409,179.60 - 54,557.28 = $354,622.32

_____

Part c)

The amount of monthly payment can be calculated with the use of PMT (Payment) function/formula of EXCEL/Financial Calculator. The function/formula for PMT is PMT(Rate,Nper,PV,FV) where Rate = Interest Rate, Nper = Period, PV = Present Value and FV = Future Value (if any).

Here, Rate = 3.6%/12, Nper = 30*12 = 360, PV = $300,000 and FV = 0

Using these values in the above function/formula for PMT, we get,

New Monthly Payment = PMT(3.6%/12,360,300000,0) = $1,363.94