Mary bought a house for RM 350,000 5 years before and paid a 10% down payment and took a 15 years bank loan for the remaining amount. The bank charges 4.38% p.a. compound interest on a reducing balance basis on property loans. Mary is to repay the loan by equal monthly installments of RM2,390.46 the first to be paid in one month from today(year 2001).

Question

Mary bought a house for RM 350,000 5 years before and paid a 10% down payment and took a 15 years bank loan for the remaining amount. The bank charges 4.38% p.a. compound interest on a reducing balance basis on property loans. Mary is to repay the loan by equal monthly installments of RM2,390.46 the first to be paid in one month from today(year 2001).

One day, Mary win the lottery about RM 50,000, she decide to take this amount to pay her remaining debt to see whether worth or not. Besides that, she still have 10 years left to finish her loan.

Answer 1

To determine whether it is worth for Mary to use the lottery winnings of RM 50,000 to pay off her remaining debt on the house loan, we need to calculate the remaining balance and compare it to the savings she would make on interest by paying it off early.

First, let's calculate the remaining balance on the loan after 5 years.

Principal amount of the loan = RM 350,000 - 10% down payment = RM 350,000 * 0.9 = RM 315,000

To calculate the monthly interest rate, we divide the annual interest rate by 12 months:
Monthly interest rate = (1 + 0.0438)^(1/12) - 1

Next, we need to calculate the monthly installment for the remaining 10 years.
Number of months remaining = 10 years * 12 months/year = 120 months
Remaining monthly installment = RM 2,390.46

Using the formula for the present value of an annuity, we can calculate the remaining balance on the loan:

Remaining balance = Remaining monthly installment * ((1 - (1 + Monthly interest rate)^(-Number of months remaining)) / Monthly interest rate)

Finally, we can compare the remaining balance to the lottery winnings of RM 50,000 to determine if it's worth paying off the loan early.

If the remaining balance is higher than RM 50,000, it would be worth using the lottery winnings to pay off the loan. However, if the remaining balance is lower, it might be more beneficial for Mary to invest the money elsewhere, as the savings on interest may not be substantial.

Remember to substitute the values into the equations to get an accurate calculation of the remaining balance.