Ron Larson
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Chapter 6 Review Exercises

Chapter 6 Review Exercises
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  • 13. Comparing Interest Using Different Rates

    You take out a home mortgage for $170,000 for 30 years at 5%. The regular monthly payment is $912.60.

    Compare the total interest you pay to the total interest of a home mortgage for $170,000 for 30 years at 7%.

    • Worked-Out Solution

      At 7%, the monthly payment is

      At 5%: The total of the 360 payments is

      At 7%: The total of the 360 payments is

      So, with the higher interest rate, you would pay

      more in interest.

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     _    _     _____               ______   _    _   
| |  | ||  |  ___||   ____     /_   _// | || | || 
| |/\| ||  | ||__    |    \\    -| ||-  | || | || 
|  /\  ||  | ||__    | [] ||    _| ||_  | \\_/ || 
|_// \_||  |_____||  |  __//   /_____//  \____//  
`-`   `-`  `-----`   |_|`-`    `-----`    `---`   
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  • 14. Comparing Interest Using Different Terms

    You take out a home mortgage for $170,000 for 30 years at 5%. The regular monthly payment is $912.60.

    Compare the total interest you pay to the total interest of a home mortgage for $170,000 for 15 years at 5%.

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     _    _     ______   _    _     _____    __   __  
| \  / ||  /_   _// | \  / ||  |  ___||  \ \\/ // 
|  \/  ||   -| ||-  |  \/  ||  | ||__     \   //  
| .  . ||   _| ||_  | .  . ||  | ||__     / . \\  
|_|\/|_||  /_____// |_|\/|_||  |_____||  /_//\_\\ 
`-`  `-`   `-----`  `-`  `-`   `-----`   `-`  --`
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  • 15. Additional Payments

    You take out a home mortgage for $170,000 for 30 years at 5%. The regular monthly payment is $912.60.

    Each month, you make the regular payment of $912.60 plus an additional $50.

    1. How much sooner do you pay off the mortgage?
    2. How much do you save in interest?
    • Worked-Out Solution

      Use a spreadsheet.

      1. You paid the loan off 360 - 321 = 39 months (or about 3 years) sooner.

      2. Had you paid the regular payments of $912.60 for 30 years, you would have paid

        in total payments. This means that you paid

        in interest. So, by making an additional payment of $50 each month, you saved

        in interest.

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      _  _     ______   _    _     ______  __    __  
 | \| ||  /_   _// | || | ||  /_   _// \ \\ / // 
 |  ' ||   -| ||-  | || | ||   -| ||-   \ \/ //  
 | .  ||   _| ||_  | \\_/ ||   _| ||_    \  //   
 |_|\_||  /_____//  \____//   /_____//    \//    
 `-` -`   `-----`    `---`    `-----`      `
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  • 16. Balloon Mortgage

    You take out a home mortgage for $170,000 for 30 years at 5%. The regular monthly payment is $912.60.

    The monthly payment for a 5-year balloon mortgage for $170,000 is equal to that of a 30-year mortgage with an annual percentage rate of 5%. Find the balloon payment and the total interest that you pay.

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     _    _    __   __    ______   _    _    _____    
| || | ||  \ \\/ //  /_   _// | || | || |  __ \\  
| || | ||   \ ` //     | ||   | || | || | |  \ || 
| \\_/ ||    | ||     _| ||   | \\_/ || | |__/ || 
 \____//     |_||    /__//     \____//  |_____//  
  `---`      `-`'    `--`       `---`    -----`
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  • 17. Buying Versus Renting

    You take out a home mortgage for $170,000 for 30 years at 5%. The regular monthly payment is $912.60.

    After 5 years, you move to a different state and sell the house for $253,350. Compare the costs of buying the home and renting a comparable home for $1200 per month. Assume that if you did not buy the home, you could have invested the down payment and earned $8000 in interest.

    • Worked-Out Solution

      Buying: Here is a tally of the amounts you spent and saved by buying.

      Renting: Here is a tally of what you would have spent by renting.

      So, for this particular scenario, it cost you less to buy than to rent.

      The reason for this is that you were able to sell your house for substantially more than you paid for it.

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     _    _    __   __   _    _    _    _    _    _   
| \  / ||  \ \\/ // | \  / || | || | || | |  | || 
|  \/  ||   \ ` //  |  \/  || | || | || | |/\| || 
| .  . ||    | ||   | .  . || | \\_/ || |  /\  || 
|_|\/|_||    |_||   |_|\/|_||  \____//  |_// \_|| 
`-`  `-`     `-`'   `-`  `-`    `---`   `-`   `-`
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  • 18. Housing Bubble

    Describe what happens to the prices of homes during a bubble. What happens when the bubble bursts?

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      ______   _    _    __   __     ___      _____   
 /_____// | || | ||  \ \\/ //   / _ \\   |__  //  
 `____ `  | || | ||   \   //   / //\ \\    / //   
 /___//   | \\_/ ||   / . \\  |  ___  ||  / //__  
 `__ `     \____//   /_//\_\\ |_||  |_|| /_____|| 
 /_//       `---`    `-`  --` `-`   `-`  `-----`  
 `-`
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