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Flexible Rate
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THE SCENARIO
Last time, we discussed how long it would take to pay off a $100,000 mortgage at 6% if we could only afford a $475 monthly payment.
Let's say, however, that we managed to find a 40-year fully-amortizing loan for $100,000 that has a $475 per month payment.
The question: What's the interest rate on that loan?
THE SOLUTION
This one is pretty straightforward.
First things first, make sure the calculator is using 12 Payments per Year.
N: 480 (The loan is for 40 years, which is 40 x 12 = 480 months)
I/YR: (This is what I'm trying to find)
PV: 100,000 (The amount borrowed is $100,000)
PMT: -475 (The monthly payment is $475)
FV: 0 (The loan amortizes fully)
This loan would have an interest rate of 4.89%.
Last time, the situation seemed hopeless - there was no way to pay off the loan! But keep in mind when looking at potential deals that there are often additional variables - in this case, the interest rate of the loan. If you can't make it work at 6%, maybe it'll work at 5%, 4% or lower.
What do you think? Does this answer surprise you? Why or why not? Let us know in the comments!
