Dr. Sarah's Condo - Part 1 - Together in Class

NAME___________________________ Circle one of 9:30 or 11:00 as your class time.

The ONLY thing I changed is the price of the condo. Everything else is really true and is all exactly as it happened! We will work on this together in class.
In August, 1998, I moved into the area and rented an apartment. Even though I had enjoyed renting for many years during college and graduate school, I disliked renting in this area (mainly because of landlord hassles, but also because of expense). In the fall of 1998, interest rates were very low and I found a condo in Blowing Rock that I liked. I locked in a rate of 6.75% for a 30 year mortgage. Let's say my condo cost 105,265. If I couldn't put 20% down, then I had to pay extra each month for special insurance which protects the bank (but does not help me), so I decided to put down 20%. The bank vice president told me (and I got this in writing) that I could pay the loan off at any time by sending in a different check marked "please pay towards principal". (One needs to mark this down, or it ends up paying interest, which means that you are not reducing the loan balance remaining!).

Together, we'll answer questions in order to prepare to use an amortization table in Excel. In the process, we'll face some decisions that I had to make before closing on the condo.
Your grade (you will turn in parts 1 and 2 at the same time) will be based on how many questions you answered correctly and completely, and the clarity and depth of your writing and explanations, so take your time to think carefully before writing down an answer and be sure to write in complete sentences! You may attach extra pages if you need more room for explanation.
A B C D E
1 condo cost     monthly rate 1st years total interest  
2 loan amount        
3 payment   30 yrs interest    
4          
5 Month # End of Month Payment Amount Interest Paid that Month Principal Paid that Month Loan Balance Remaining
6 1        
7 2        
8 3        

  • How much did I need for a downpayment? Show work.





  • How much did I need to take out as a loan? Show work.





  • What is the monthly interest rate? Show work.



  • When I made my first payment, why did I already have interest to pay?





  • What is the interest ($ not rate) that I must pay at the end of the first month? Show work.





  • Why does it make sense that the bank should end up with more money than the original loan amount?








  • Explain in words how we came up with the loan payment formula.








  • Set up a formula to solve for the monthly loan payment. Explain why you chose the formula that you did.








  • Solve for the monthly loan payment on your calculator. Write down the Calculator keys that you used and the answer.








  • How much interest ($) do I pay over 30 years? Show work.





  • If we use the periodic payment formula, with the monthly payment equal to our monthly loan payment, how much money does the bank end up with? Set up the formula here and then solve for an answer. Notice that the answer is a lot more money than the loan amount, as it should be.










  • How much money did I pay towards the principal balance of the loan at the end of the first month? Show work.







  • What is my new loan balance after I make my first payment? Show work.







  • Why is my payment at the end of the 2nd month the same as at the end of the first month?







  • What is my interest ($) for the 2nd month? Show work.






  • Why is my interest ($) for the 2nd month less than my interest ($) for the 1st month?










  • How much money did I pay towards the principal balance of the loan at the end of the second month? Show work.






  • What is my new loan balance after I make my second payment? Show work.






    Before I finalized all the bank payment numbers, I found out that a deceased relative was leaving me some money, which would arrive before I closed the loan (this really happened!). The vice president gave me two options.

    Option 1: Buy down the rate I could leave the loan amount the same, and pay 2.375% of the loan amount (these are called points) to reduce the rate from 6.75% down to 6.25%.

    Option 2: Take out a smaller loan The rate would stay at 6.75%, but I could reduce the loan amount by $2000. For each option, find the monthly payment and how much interest ($) I pay over 30 years. Show work and formulas.