Assignment 2: Financial Project


Due Week 7 and worth 55 points

Five (5) years ago, you bought a house for $171,000, with a down payment of $30,000, which meant you took out a loan for $141,000. Your interest rate was 5.75% fixed. You would like to pay more on your loan. You check your bank statement and find the following information:


Escrow payment


$261.13


Principle and Interest payment


$822.84


Total Payment


$1,083.97


Current Loan Balance


$130,794.68




Write a one to two (1-2) page paper in which you address the following:

Part 1

With your current loan, explain how much additional money you would need to add to your monthly payment to pay off your loan in 20 years instead of 25. Decide whether or not it would be reasonable to do this if you currently meet your monthly expenses with less than $100 left over.
•(a) Explain your strategy for solving the problem.
•(b) Present a step-by-step solution of the problem.
•(c) Clearly state your answer to Part 1. What is your decision?



Part 2

To determine how much additional money you would need to add to your monthly payment to pay off your loan in 20 years instead of 25, you need to calculate the new monthly payment amount.

Here's a step-by-step solution to the problem:

Step 1: Calculate the remaining loan term in years for the current loan.
Remaining Loan Term = 25 years - 5 years = 20 years

Step 2: Calculate the remaining number of monthly payments for the current loan.
Remaining Number of Monthly Payments = Remaining Loan Term * 12 = 20 years * 12 = 240 months

Step 3: Calculate the monthly interest rate for the current loan.
Monthly Interest Rate = Annual Interest Rate / 12 = 5.75% / 12 = 0.00479

Step 4: Calculate the new monthly payment amount for a 20-year loan.
New Monthly Payment Amount = Current Loan Balance / Remaining Number of Monthly Payments + Escrow Payment
= $130,794.68 / 240 + $261.13
= $544.97 + $261.13
= $806.10

Step 5: Calculate the additional money you need to add to your monthly payment.
Additional Monthly Payment = New Monthly Payment Amount - Principle and Interest Payment
= $806.10 - $822.84
= -$16.74

Since the additional monthly payment is negative (-$16.74), it means that you would need to reduce your monthly payment by $16.74 to pay off the loan in 20 years instead of 25.

In terms of whether it would be reasonable to do this if you currently meet your monthly expenses with less than $100 left over, it depends on your financial situation and priorities. If reducing the loan term is a priority for you, and you can handle a slightly lower monthly surplus, then it might be reasonable. However, if the reduction in the monthly surplus would cause financial strain or limit your ability to save or handle unexpected expenses, it may not be advisable.

Therefore, based on the calculations and your current financial situation, the decision to add additional money to your monthly payment to pay off your loan in 20 years instead of 25 is subjective and depends on your financial goals and circumstances.