Question
In: Economics
You purchase a town house for $250,000. Since you are able to make a down payment...
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 $200,000 mortgage loan for 20 years at a 5 percent annual rate of interest.
a. What are the annual payments that cover the interest and principal repayment?
b. How much of the first payment goes to cover the interest?
c. How much of the loan is paid off during the first year?
d. What is the interest payment during the second year?
e. What is the remaining balance after the second year?
f. Why did the interest payment change during the second year?
Solutions
Expert Solution
Amortization table for yearly loan payment.
| Total cost | 250000 | ||||
| Down Payment | 50000 | ||||
| Amount of loan | 200000 | ||||
| interest rate | 5% | ||||
| time (yrs) | 20 | ||||
| Yearly payment | 16,048.52 | ||||
| Year | Begining Balance | Yearly Payment | Yearly Interest | Principle Amount | Ending Balance |
| 1 | 200000 | 16,048.52 | 10,000.00 | 6,048.52 | 1,93,951.48 |
| 2 | 1,93,951.48 | 16,048.52 | 9,697.57 | 6,350.94 | 1,87,600.54 |
| 3 | 1,87,600.54 | 16,048.52 | 9,380.03 | 6,668.49 | 1,80,932.05 |
| 4 | 1,80,932.05 | 16,048.52 | 9,046.60 | 7,001.91 | 1,73,930.13 |
a) Yearly payment = 16,048.52
b) Interest in first year = 10,000.00
c) Loan paid off during yr 1 = principal paid in yr 1 = 6048.52
d) Interest payment in second yr = 9,697.57
e) Remaining balance after 2nd year = ending balance after second year payment = 1,87,600.54
f) Interest payment changed during the second year because interest is charged only of the principal outstanding,
in yr 1 principal outstanding was 200000 and in yr 2 principal outstanding was (principal outstanding in yr 1 - principal paid in yr 1 = 200000-6048.52 ) 1,93,951.48 .
Therefore interest changed in yr2
Showing formula to create table in excel
| Total cost | 250000 | ||||
| Down Payment | 50000 | ||||
| Amount of loan | =B1-B2 | ||||
| interest rate | 0.05 | ||||
| time (yrs) | 20 | ||||
| Yearly payment | =PMT(B4,B5,-B3) | ||||
| Year | Begining Balance | Yearly Payment | Yearly Interest | Principle Amount | Ending Balance |
| 1 | =B3 | =$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 |
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