Question

David and Debi Davidson have just signed a 15-year, 4% fixed rate mortgage for $360,000 to buy their house. Find out this couple's monthly mortgage payment by preparing a loan amortization schedule for the Davidson’s for the first 2 months; find out how much of their payments applied to interest; and after 2 payments, how much of their principal will be reduced.

(Please construct a loan amortization schedule and show your calculations).

Answer 1

Loan Amortization Schedule:

Month	Monthly payment	Interest	Principal	Balance outstanding
1	$2,663	$1,200	$1,463	$358,537 ( 360,000 – 1,463)
2	$2,663	$1,195	$1,468	$357,069 ( 358,537 – 1,468)

1) David & Debi Davidson's monthly mortgage payment:

Monthly payment = P *r*(1+r)ⁿ/ [(1+r)ⁿ-1]

Given; P = $ 360,000 , r= 4% / 0.04 , n = 15 i.e 15*12 = 180 months

=360,000*0.04* (1+0.04/12)¹⁸⁰/ [(1+0.04/12)¹⁸⁰-1]

= 360,000*0.04*1.82/ 0.82          

=26,208/0.82

=31,961/12

= $2,663

Interest Calculation :

Month 1 = 360,000*0.04/12 Month 2 = 358,537*0.04/12

= 360,000* 0.003333 = 358,537*0.003333

= $1,200 = $1,195

2) Amount of their payments applied to interest:

Month 1 = $1,200

Month 2 = $1,195

Total =  $2,395

3) After two payments principal amount will be reduced to:

Month 1= Monthly payment - Interest

= $2,663- $1,200

=$1,463 => This portion of payment goes towards reducing the loan from $360,000 to $358,537.

Month 2= Monthly payment - Interest

= $2,663- $1,195

= $1,468 => This portion of payment goes towards reducing the balance of loan from $358,537 to $357,069.