1. Credit Card Debt
Assume you have a balance of $1200 on a credit card with an APR of
18%, or 1.5% per month. You start making monthly paymentsof $200,
but at the same time you charge $75 per month to the credit card. Assume
that interest for the given month is based on the balance for the previous
month. The following table shows how you can calculate your monthly balance.
| Month | Payment | Expenses | Interest | New Balance |
| 0 | - | - | - | 1200 |
| 1 | 200 | 75 | 0.015 x 1200 = 18 | 1200 - 200 + 75 + 18 = 1093 |
| 2 | 200 | 75 | ||
| 3 | 200 | 75 |
Complete and extend the table to show your balance at the end of each month until the debt is paid off. How long does it take to pay off the debt?
2. Loan Payments
For the loans described below, do the following:
(i) Calculate the monthly payment.
(ii) Determine the total payment
over the term of the loan.
(iii) Determine how much of the
total payment goes to the principal and how much to interest.
a) A home mortgage of $120,000 with a fixed APR of 5.2% for 15
years.
b) A home mortgage of $120,000 with a fixed APR of 5.2% for 30
years.
c) A home mortgage of $120,000 with a fixed APR of 5.5% for 15
years.
3. During first 3 months and afterwards
For a home mortgage of $120,000 with a fixed APR of 5.6% over 30 years,
calculate
the portion of the monthly payment that goes to interest,
the portion of the monthly payment that goes towards the principal
4. paying off credit card balances
Complete the table (APR = 18% annually), initial balance $300:
| Month | Prior Balance (+) | Interest (+) | New Charges/Expenses
(+) |
Payment (-) | New Balance |
| 1 | 300 | 300*.015 | 175 | 300 | 179.50 |
| 2 | 150 | 150 | |||
| 3 | 350 | 400 | |||
| 4 | 450 | 500 | |||
| 5 | 100 | 0 | |||
| 6 | 100 | 100 | |||
| 7 | 150 | 200 | |||
| 8 | 80 | 100 |
5. Closing costs and points
You need a loan of 270,000 to buy a home.
Choice 1: 15 year fixed rate 4.25% with closing costs
of $1200 and 3 points.
Choice 2: 30 year fixed rate 4.75% with closing costs
of $1200 and 1 point.
Calculate your monthly payments and total closing costs in each case. Briefly discuss how you would decide between the two choices.
6. How much house can you afford?
You can afford monthly payments of $2000. If the current mortgage rates
are 5.5% for a 30 year fixed rate loan, what principal can you afford?
If you are required to make a 20% down payment and you have cash on
hand to do it, what price home can you afford?