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Interest Rate problem!!

Discussion in 'General Investing Discussion' started by Dally_M, 27th Sep, 2010.

  1. Dally_M

    Dally_M New Member

    27th Sep, 2010
    Perth, WA
    Hey guys, Im having trouble figuring this question out..Ive used an amortizing loans formula & then an annuity formula but still having difficulty. Thanks

    Q) A homeowner has a $200,000 home fully financed with a 20-year mortgage, paid monthly at an interest rate of 7.25% per annum with monthly compounding. After five years he receives $50,000 as an inheritance. If he pays this $50,000 toward his mortgage along with his regular payment, by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage?

    A) 4 years B) 3 years C) 5 years D) 6 years
  2. Billv

    Billv Getting there

    15th Jul, 2007
    Sydney, NSW
    I think it will be around 6 years

    I assumed that after 5 years the loan balance would be approx $180K so depositing $50K will bring it down to $130K and approx half of the monthly repayment $800/m or $10K pa would be going towards paying off the principle.

    STGeorge has an "extra payments calculator" where you can enter the $800 repayment after 5 years and you can see the result