Question

The Smiths were just approved for a 25 year mortgage at an 11% fixed rate. If they had not filed bankruptcy in the past, they could have gotten a rate of 7%. If their loan amount is $128,000, how much more per month will the Smiths be paying for their mortgage as a result of their bankruptcy

Answer 1

Answer:

Smith is paying extra $349.86 per month as a result of Bankruptcy.

Explanation:

Solution:

For this question to solve, first we need to find the monthly loan payments as a result of bankruptcy. Secondly, we have to find the monthly loan payments without bankruptcy application. Finally, we need to calculate the difference to know the extra amount per month Smith will be paying as a result of bankruptcy.

Step 1: Monthly Loan Payments (Bankruptcy)

Loan amount = $128,000

n = 25 years = period

Interest rate = 11% (Bankruptcy)

As we know,

Formula for monthly payment:

Monthly Payment = A x r x $\frac{(1+r)^{n} }{(1+r)^{n} - 1 }$

Where, A is the loan amount.

r = Periodic interest rate = 11%/12 = 0.00916  (NOte: 12 is the number of months in a year)

n = period = 25years x 12 = 300 months.

Plugging in the values, we get.

Monthly Payment = 128000 x 0.00916 x $\frac{(1+0.00916)^{300} }{(1+0.00916)^{300} - 1 }$

Monthly Payment = $1254.54

This is the payment as a result of bankruptcy.

Now, we need to find monthly payment using same formula in case of absence of bankruptcy.

Step 2: Monthly Loan Payments (Without Bankruptcy)

Monthly Payments = A x r x $\frac{(1+r)^{n} }{(1+r)^{n} - 1 }$

Here,

Interest rate = 7%

So,

r = 7%/12  = 0.00583

Plugging in the values, we get.

Monthly Payments = 128000 x 0.00583 x $\frac{(1+0.00583)^{300} }{(1+0.00583)^{300} - 1 }$

Monthly Payments = $904.68

This is the amount without bankruptcy.

Now,

Extra amount per month that Smith is paying as a result of Bankruptcy = $1254.54 - $904.68 = $349.86

Hence,

Smith is paying extra $349.86 per month as a result of Bankruptcy.