Question

The Schmidts brought a house 10 years ago and took out a mortgage. They are considering selling and want to know how much they still owe. They know their monthly payment and interest rate. Which of the following methods and correctly allow them to find the amount still owed?

Answer 1

Answer: a. They can find the present value of the remaining 20 years worth of payments.

Step-by-step explanation:

The present value of the payments for the servicing of the loan is the amount of the loan that is still owed because the payments include both the interest and the principal repayments.

The Schmidts can therefore find out the amount they still owe by checking the present value of the remaining 20 years worth of payments.

As the payments are usually constant they can be treated as an annuity so using the monthly payment as the annuity, the interest rate as the discount rate and the 20 years ( 240 months) as the period, they should be able to find the present value of the loan.