In: Accounting
Consider a $5,000,000, 9%, 25-year mortgage with monthly payments. Compute the first three payments and the loan balance after the third payment for each of the following loan types: (a) Interest-only, (b) CAM, (c) CPM.
a) INTEREST ONLY METHOD
In interest only method the borrower is obliged to pay the interest only on the loan ffor a certain period of time.
HERE ,
LOAN AMOUNT = $ 5,000,000
INTEREST = 9 %
TERM OF MORTGAGE = 25 YEARS
INTEREST = LOAN AMOUNT * INTEREST /12
= $5,000,000*9%/12
= $37500
INTEREST FOR 3 MONTHS ARE SAME IN THIS CASE. AND THE LOAN BALANCE IS $ 5000000 WHY BECAUSE THE INTEREST AMOUNT IS ONLY DEDUCTED FOR A CERTAIN PERIOD . PRINCIPLE AMOUNT WILL NOT DEDUCT.
b) CAM ( CONSTANT AMORTISATION MORTGAGE)
LOAN AMOUNT = 5000000
INTEREST = 9%
TERM OF LOAN = 25 YEARS
PAYMENT PER YEAR = 12
NUMBER OF PAYMENTS = 300
MONTH | OPENING BALANCE | INTEREST | AMORTIZATION | MONTHLY PAYMENT | ENDING BALANCE |
1 | 5000000 | 37500 | 16667 | 54166 | 4945834 |
2 | 4945834 | 37093 | 16667 | 53760 | 4892074 |
3 | 4892074 | 36690 | 16667 | 53357 | 4838716 |
AMORTIZATION = ORIGINAL LOAN BALANCE / NO OF PAYMENTS
MONTHLY PAYMENT = INTEREST + AMORTIZATION