Question

Craig decides to purchase a property that has been valued at $475,000. He has $80,000 available as a deposit and will require a mortgage for the remaining amount. The bank offers him a 25 year mortgage at 2% interest. Calculate the total interest he will pay over the life of the loan, assuming he makes monthly payments.

Answer 1

Answer:

1674.22

Step-by-step explanation:

Answer 2

A mortgage is a means financing by lending money from a creditor who in return takes ownership of the property of the debtor, such that the creditor no longer continues in the ownership status once the debt is paid

The total interest paid over the life of the loan is approximately $107,266

The above calculated value is correct due to the following reason:

The given parameters are;

The value of the property = $475,000

The amount of money Craig has = $80,000

The amount of mortgage required = The remaining amount for the property

The number of years of mortgage offered by the bank, t = 25 years

The interest rate on the mortgage, r = 2%

Required:

The total interest Craig will pay over the life of the loan by making monthly payments

Solution:

The monthly payment formula is given as follows;

$M = \dfrac{P \cdot \left(\dfrac{r}{12} \right) \cdot \left(1+\dfrac{r}{12} \right)^n }{\left(1+\dfrac{r}{12} \right)^n - 1}$

Where;

M = The amount paid each month (monthly payment)

P = The loan amount = $475,000 - $80,000 = $395,000

n = The number of monthly payments = 25 × 12 = 300

Which gives;

$M = \dfrac{395,000 \times\left(\dfrac{0.02}{12} \right) \cdot \left(1+\dfrac{0.02}{12} \right)^{300} }{\left(1+\dfrac{0.02}{12} \right)^{300} - 1} \approx 1,674.22$

The total interest paid = M × n - P

∴ The total interest paid ≈ 1,674.22 × 300 - 395,000 = 107,266

The total interest paid over the life of the loan $I_{tot}$ ≈ $107,266

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