Question

You purchase a town house for $250,000. Since you are able to make a down payment of 20 percent ($50,000), you are able to obtain a $200,000 mortgage loan for 20 years at a 5 percent annual rate of interest.

a. What are the annual payments that cover the interest and principal repayment?

b. How much of the first payment goes to cover the interest?

c. How much of the loan is paid off during the first year?

d. What is the interest payment during the second year?

e. What is the remaining balance after the second year?

f. Why did the interest payment change during the second year?

Answer 1

Amortization table for yearly loan payment.

Total cost	250000
Down Payment	50000
Amount of loan	200000
interest rate	5%
time (yrs)	20
Yearly payment	16,048.52
Year	Begining Balance	Yearly Payment	Yearly Interest	Principle Amount	Ending Balance
1	200000	16,048.52	10,000.00	6,048.52	1,93,951.48
2	1,93,951.48	16,048.52	9,697.57	6,350.94	1,87,600.54
3	1,87,600.54	16,048.52	9,380.03	6,668.49	1,80,932.05
4	1,80,932.05	16,048.52	9,046.60	7,001.91	1,73,930.13

a) Yearly payment = 16,048.52

b) Interest in first year = 10,000.00

c) Loan paid off during yr 1 = principal paid in yr 1 = 6048.52

d) Interest payment in second yr = 9,697.57

e) Remaining balance after 2nd year = ending balance after second year payment = 1,87,600.54

f) Interest payment changed during the second year because interest is charged only of the principal outstanding,

in yr 1 principal outstanding was 200000 and in yr 2 principal outstanding was (principal outstanding in yr 1 - principal paid in yr 1 = 200000-6048.52 ) 1,93,951.48 .

Therefore interest changed in yr2

Showing formula to create table in excel

Total cost	250000
Down Payment	50000
Amount of loan	=B1-B2
interest rate	0.05
time (yrs)	20
Yearly payment	=PMT(B4,B5,-B3)
Year	Begining Balance	Yearly Payment	Yearly Interest	Principle Amount	Ending Balance
1	=B3	=$B$7	=B12*($B$4)	=C12-D12	=B12-E12
2	=F12	=$B$7	=B13*($B$4)	=C13-D13	=B13-E13
3	=F13	=$B$7	=B14*($B$4)	=C14-D14	=B14-E14
4	=F14	=$B$7	=B15*($B$4)	=C15-D15	=B15-E15