Question

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.

Answer 1

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