630 CHAPTER 10 Consumer Mathematics 1.3% per month finance charge on the remaining balance starting with the second month. a) How many months will it take them to repay the loan? 7 months b) How much interest will they pay on the loan? $86.58 c) Which method of borrowing will cost the Chans the least amount of interest, the installment loan in Exercise 26 or using the credit card? The installment loan saves them $52.08. Research Activities 49. Paying Off Your Credit Card Debt Suppose you purchase a new wardrobe for $1000 with a credit card. You decide to pay for your new wardrobe by making the minimum monthly payment each month. You do not charge anything else to this credit card until you have the wardrobe paid off. Your credit card company determines your minimum monthly payment by adding all new interest to 1% of the outstanding principal. The credit card company charges an annual percentage rate of 18%. Go to an Internet credit card payment calculator web site such as Bankrate.com to answer the following questions. a) How long will it take you to pay off the entire credit card debt if you make the minimum monthly payments? b) How much interest will you pay? c) Adding the interest paid to the cash price, determine the total cost of your wardrobe. 50. Car Lease Write a brief report giving the advantages and disadvantages of leasing a car. Determine all the individual costs involved with leasing a car. Indicate why you would prefer to lease or purchase a car at the present time. 51. Washer and Dryer Suppose your family currently does not own a washer and dryer and you do not have the money needed to purchase the appliances. Do research to determine if it would be less expensive to borrow money on a 5-year installment loan and purchase the appliances or to continue to do laundry at the local coin-operated laundry until you have enough money to pay cash for the appliances. Be sure to include the utility costs of running your own appliances and the cost of driving to the coin-operated laundry. 52. Rule of 78s When an installment loan is repaid early, there is a second method, in addition to the actuarial method, used for calculating unearned interest called the rule of 78s. Although rarely used today, there are still some lenders using this method. Write a brief report describing the rule of 78s and comparing it to the actuarial method. Part of the American dream is to own your own home. Owning your home means that you don’t pay rent to someone else, but rather, in a way, you pay rent to yourself. Often you are also rewarded with several financial benefits. In this section, we will discuss the many advantages of owning your own home. We will also discuss the many financial obligations that must be met prior to obtaining a home loan as well as the obligations that must be met after you obtain the loan. Buying a House with a Mortgage SECTION 10.5 LEARNING GOALS Upon completion of this section, you will be able to: 7 Solve problems involving conventional mortgages. 7 Solve problems involving adjustable-rate mortgages. Why This Is Important Most people obtain a mortgage to purchase a new home. Understanding mortgages may help you be financially prepared when you are ready to purchase a house. When purchasing a home, buyers usually seek a mortgage from a bank or other lending institution. Before approving a mortgage, which is a long-term loan, the bank will most likely require the buyer to have a specified minimum amount for the down payment. The down payment is the amount of cash the buyer must pay to the seller before the lending institution will grant the buyer a mortgage. If the buyer has the down payment and meets the other criteria for the mortgage, the lending institution prepares a written agreement called the mortgage, stating the terms of the loan. The loan specifies the repayment schedule, the duration of the loan, whether the loan can be assumed by another party, and the penalty if payments are late. The final step of purchasing a home is called the closing. At the closing, the home is transferred from the seller to the buyer and the buyer obtains the mortgage from the lender to finance the home purchase. Hurst Photo/Shutterstock
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