Melissa has owned a rental property for 30 years and she loves the cash flow, but is tired of the management. She is looking to sell her property.
Melissa prefers to have a steady stream of income for the rest of her life rather than a lump sum of cash in the bank earning little interest. So, she decides that she is going to sell her property and "carry back" a mortgage, which will allow her to receive a steady stream of income for the rest of her life from the new buyer without Melissa having to deal with the hassle of management.
Melissa sells her rental property for $600,000, she takes $50,000 down and carries the remaining $550,000 at 4% interest. Melissa does not want to outlive her money as she wants to be sure that she get the monthly payments of $2,500 for the rest of her life. Assume that the loan is fully amortized, so it will pay off in the end. For how many months can Melissa receive $2,500/month?
Answer:
(These are the key strokes to enter into your financial calculator)
N = ?? (this is what we are solving)
I = 4 (this is her desired interest rate)
PV = ($550,000) (this is the amount of the mortgage that Melissa is "carrying back." Note that it is entered into the calculator as a negative)
PMT = $2,500 (this the desired monthly cash flow that Melissa would like. This number is entered into the calculator as a positive)
PV = 0 (the note is fully amortized)
N = 397.19 (Melissa will receive monthly payments of $2,500 for 397.19 months, or 397 full months and then a partial payment on the final 398th month)
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