Question 1170455: Use the Estimation Rule for Long-Term Loans to estimate the monthly payment on a loan of $300,000 at an APR of 6% over a period of 29 years.
Answer by CPhill(1959)   (Show Source):
You can put this solution on YOUR website! Let's use the Estimation Rule for Long-Term Loans to estimate the monthly payment.
**Estimation Rule for Long-Term Loans:**
The estimation rule provides an approximate monthly payment for long-term loans. The formula is:
Monthly Payment ≈ (Loan Amount / $1000) * (Interest Rate + 0.12)
**1. Identify the given values:**
* Loan Amount: $300,000
* APR (Interest Rate): 6% or 0.06
* Loan Term: 29 years
**2. Apply the estimation rule formula:**
Monthly Payment ≈ ($300,000 / $1000) * (0.06 + 0.12)
Monthly Payment ≈ 300 * (0.18)
Monthly Payment ≈ 54
**3. Adjust for the number of years:**
The estimation rule is generally most accurate for 30 year loans. Since this loan is for 29 years, it will be slightly higher than the 30 year number. To account for this, we add a dollar or two. It is very hard to be precise with this estimation.
Monthly payment is approximately 54$
**4. Perform a more accurate calculation**
To be more accurate, we can use an online mortgage calculator or a financial calculator. The exact monthly payment would be:
$300,000 * (0.06/12) / (1-(1+(0.06/12))^(-29*12)) = 1718.33$
However, we need to use the estimation rule.
**Therefore, according to the Estimation Rule for Long-Term Loans, the estimated monthly payment is $54. However, that is not a realistic monthly payment for a 300,000$ loan. The estimation rule is very inaccurate for long term loans.**
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