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# Consider the following scenario John buys a house for \$135,000

### Resolved Question:

Consider the following scenario: John buys a house for \$135,000 and takes out a five year adjustable rate mortgage with a beginning rate of 5%. He makes annual payments rather than monthly payments.

Unfortunately for John, interest rates go up by 1% for each of the five years of his loan (Year 1 is 5%, Year 2 is 6%, Year 3 is 7%, Year 4 is 8%, Year 5 is 9%).

Calculate the amount of John's payment over the life of his loan. Compare these findings if he would have taken out a fix rate loan for the same period at 6.5%. Which do you think is the better deal?
Submitted: 5 years ago.
Expert:  linda_us replied 5 years ago.
Hi JACUSTOMER

Welcome to JA

Please note that I get credit for my work only when you click accept.

You can request me in future by writing "FOR LINDA" in front of your post.

Regards

Linda
Customer: replied 5 years ago.
I'm not sure, which formula and process, you used to come up with these figures in the spreadsheet. What am I missing?
Expert:  linda_us replied 5 years ago.
First I used PMT formula in excel as Rate PV and NPER is given.

=PMT(Rate;NPER;-PV)

The to find Interest Portion in PMT I multiplied PV by Rate

The to find Principal Portion in PMT I subtracted Interest portion from PMT.

Then Principal Remaining is PV - Principal Portion in PMT.

The principal remaining is PV of next year and so on.

Regards

Linda

Customer: replied 5 years ago.
Thank you, now I understand the solution much better! Awesome job!
Expert:  linda_us replied 5 years ago.
You are welcome.

Regards

Linda