Smith purchases a home and obtains a $65,000 loan. The principal and interest payments are $8.54 per $1,000. The loan is for 30 years at 9%. How much does Smith pay in total interest over the life of the loan?
To calculate how much Smith pays in total interest over the life of the loan, we can follow these steps:
Step 1: Calculate the total loan amount.
Given that Smith obtained a $65,000 loan, the total loan amount is simply $65,000.
Step 2: Determine the monthly payment.
To calculate the monthly payment, we need to find the principal and interest payments per month. Given that the principal and interest payments are $8.54 per $1,000, we can calculate the monthly payment as follows:
Monthly payment = Total loan amount / $1,000 * Principal and interest payments per $1,000
Monthly payment = $65,000 / $1,000 * $8.54
Monthly payment = $555.10
Step 3: Calculate the total interest paid over the life of the loan.
To calculate the total interest paid, we need to determine the total amount paid over the life of the loan and subtract the original loan amount. The total amount paid is the monthly payment multiplied by the number of months in the loan term. Since the loan term is 30 years and there are 12 months in a year, the total number of months is 30 * 12 = 360.
Total amount paid = Monthly payment * Number of months
Total amount paid = $555.10 * 360
Total amount paid = $199,836
Total interest paid = Total amount paid - Total loan amount
Total interest paid = $199,836 - $65,000
Total interest paid = $134,836
Therefore, Smith will pay a total of $134,836 in interest over the life of the loan.