Question

A floting rate mortgage loan is made for $100,000 for a 30-year period at an initial rate of 12 percent interest. However, the borrower and lender have negotiated a monthly payment of $800.00

What will the loan balance at the end of year 1?

What if the interest rate increases to 13 percent at the end of year 1? How much interest will be accrued as negative amortization in year 1 if the payments remains at $800? Year 5?

Answer 1

1. Loan Balance at the end of Year 1

The Loan Balance at the end of Year 1 = $102536.50

2. for the year 1 there will be still 12% is going as interest rate. There is a negative balance of $200 after payment of first month installment. Thus Negative Amortization = "FV(0.01,12,-200)

Here 0.01 is the per month interest and 12 is the number of months in year 1 and -$200 is negative balance in the first month

Thus Negative Amortization = "FV(0.01,12,-200)"

Negative Amortization at the end of year 1= -$2536.50

Negative Amortization at the end of year 5

Loan Balance at the end of year 4 = FV(0.13/12,36,$800,-$102536.50)

Here 0.13/12 is the per month interest, 36 is number of months between year 2 and year 4 (Both inclusive). $800 is monthly payment, -$102536.50 is the balance at the end of year 1

Loan Balance at the end of year 4 = FV(0.13/12,36,$800,-$102536.50)

Loan Balance at the end of year 4 = -$116132.46

Loan Balance at the end of year 5 = FV(0.13/12,48,$800,-$102536.50)

Here 0.13/12 is the per month interest, 48 is number of months between year 2 and year 5 (Both inclusive). $800 is monthly payment, -$102536.50 is the balance at the end of year 1

Loan Balance at the end of year 5 = FV(0.13/12,36,$800,-$102536.50)

Loan Balance at the end of year 5 = -$121969.35

Negative Amortization for the Year 5 = Loan balance at year 5 - Loan Balance at the end of Year 4

Negative Amortization for the Year 5 = $121969.35 - $116132.46

Negative Amortization for the Year 5 = $5836.88