Question

Raymond took out a 25-year loan for $135,000 at an APR of 3.6% compounded monthly. If his bank charges a prepayment fee of 6 months' interest on 80 % of the balance, what prepayment fee would he be charged for paying off the loan 5 years early?
A. 683.10
B 546.08
C. 695.49
D. 543.46

Answer 1

Answer:

  D.  543.46

Step-by-step explanation:

The formula for the remaining balance on the loan is ...

  A = P(1 +r)^n +p((1 -(1 +r)^n)/r)

where P is the principal, p is the monthly payment, r is the monthly interest rate, and n is the number of months.

We have P=135,000, p = TBD, r = 3.6%/12 = .003, n = 20×12 = 240.

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The monthly payment is given by the same formula by setting A=0. In this case, n is 25 years, or 300 payments. Solving for p, we get, ...

  p = Pr(1 +r)^n/((1 +r)^n -1) = Pr/(1 -(1 +r)^-n)

So, the monthly payment is ...

  p = 135,000×0.003/(1 -1.003^-300) = 683.10

Using this value in the formula for remaining balance, we get ...

  A = 135000(1.003^240) +683.10((1 -1.003^240)/0.003) = 37,459.20

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80% of this balance is 29,967.36. The answer choices only make sense if we assume the interest penalty is equivalent to the interest being compounded monthly:

  $29,967.36 × (1.003^6 -1) = $543.47

The closest match among answer choices is ...

  D.  543.46