Question

Paula purchased a house for $300,000. After providing a 20% down payment, she borrowed the balance from the local savings and loan under a 30-year 6% mortgage loan requiring equal monthly installments at the end of each month. Which time value concept would be used to determine the monthly payment

Answer 1

Answer:

The concept of EMI i.e. Equal monthly installments will be used.

Explanation:

Given that:

Purchase amount of house = $3,00,000

Down payment made = 20% of 3,00,000 = $60,000

Balance amount = $2,40,000

Therefore, to determine the monthly payment the concept of Equal monthly installment will be used.

Answer 2

The time value concept that would be used to determine the monthly payment would be the Present Value of an ordinary annuity.

The loan taken by Paula requires equal monthly installments (EMI) at the end of each month. EMI would mean annuity payments due at the end of each month.

Hence, the present value of these EMIs discounted at $6$% would be equal to the loan amount taken by Paula i.e. $$2,40,000$ ($80$% of $$3,00,000$).

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