(Amortization Word Problems)
To solve an exponential or logarithmic word problem, convert the
narrative to an equation and solve the equation.
There is a relationship between the mortgage amount, the number of payments, the amount of the payment, how often the payment is made, and the interest rate. The following formulas illustrate the relationship:
where P = the payment, r = the annual rate, M = the mortgage
amount, t = the number of years, and n = the number of payments
Example 3: Suppose a bank offers you a 9% interest rate on a
25-year mortgage to be paid back with monthly payments. Suppose the
most you can afford to pay in monthly payments is $700. How much of
a mortgage could you afford?
Solution and Explanations:
substitute 9% for r (the annual interest rate), 12 for n (the number of payments per year, 25 for t (the number of years), and $700 for P (the mortgage payment). You are solving for M (the amount of the mortgage you can afford)
If you would like to review another example, click on Example.
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Author: Nancy Marcus