Can someone please xplain this answer to me?

Question

"Consider the following scenario: John buys a house for $250,000 and takes out a five year adjustable rate mortgage with a beginning rate of 5%. He makes annual payments rather than monthly payments. ately for John, interest rates go up by 1% for each of the 5 years of his loan (Year 1 is 5%, Year 2 is 6%, Year 3 is 7%, Year 4 is 8%, Year 5 is 9%). Calculate the amount of John's payment over the life of his loan. Compare these findings if he would have taken out a fix rate loan for the same period at 6.25%. Which do you think is the better deal?

"

Year PMT Interest Principal $250,000

0.05 5 $57,743.70 12500 $45,243.70 $104,756.30

0.06 4 $30,231.78 $6,285.38 $23,946.40 $80,809.90

0.07 3 $30,792.75 $5,656.69 $25,136.05 $55,673.85

0.08 2 $31,220.18 $4,453.91 $26,766.27 $28,907.57

0.09 1 $31,509.26 $2,601.68 $28,907.57 $0.00

Total $181,497.66

Loan

Year PMT Interest Principal $150,000

0.0625 5 $35,851.98 9375 $26,476.98 $123,523.02

0.0625 4 $35,851.98 $7,720.19 $28,131.79 $95,391.23

0.0625 3 $35,851.98 $5,961.95 $29,890.03 $65,501.20

0.0625 2 $35,851.98 $4,093.82 $31,758.16 $33,743.04

0.0625 1 $35,851.98 $2,108.94 $33,743.04 $0.00

Total $179,259.91

How do you get the PMT and the Principal? I'm confused Someone please explain

Answer 1

There's clearly a mistake here. Look at the first line under the $250k loan table. The year one principal on the 5% is $47,243.70. That amount is based on a $250k loan, which is fine. Then look, however, at the remaining balance of $104,756.30.

If this is a $250k loan the remaining balance would be $204,756.30 (subtract the $47,243.70 from $250,000). But it's not.

So, the pmt and principal are simple math using functions in Excel. I verified some of your #'s above.

Sorry, I don't know what to tell you. It's an error or trick question.