Question

1. Barney and Betty are purchasing their first house. They expect to put down $58,000 (gifts from their wedding, some savings, inheritance from grandparents, and an accident settlement) which will be the 25% down payment their mortgage broker says the bank needs to finance the purchase. They are going to take out a 4.45%, 20-year fixed mortgage on the balance.
   1. How much is the purchase price of the house?

2. How much will they be financing on the mortgage?

3. What will their monthly payment amount be?

4. After 1-year, how much interest will they have paid on the loan?

5. After 1-year, how much principal will they have paid on the loan?

Answer 1

Answer a:

Given:

Amount of down payment which is 25% = $58,000

Hence:

Purchase price of the house = 58000 / 25% = $232,000

Purchase price of the house = $232,000

Answer b:

Financing on the mortgage = Purchase price of the house - Down payment =232000 - 58000 = $174,000

Financing on the mortgage = $174,000

Answer c:

Monthly Interest = 4.45%/12

Number of monthly installments = 20 * 12 = 240

To get monthly payment we will use PMT function of excel:

PMT (rate, nper, pv, fv, type)

= PMT (4.45%/12, 240, -174000, 0, 0)

= 1096.119265

= $1,096.12

Monthly payment amount = $1,096.12

Answer d:

The amortization schedule for first 12 months ( one year) is given below:

Total Interest payment over the life of the loan = Monthly Installment * 240 - Loan amount

= 1096.119265 * 240 - 174000

= $89,068.62

From above amortization table, interest payment in first one year = $7,631.27

After 1-year, amount of interest will they have paid on the loan = 89,068.62 - 7,631.27 = $81,437.35

After 1-year, amount of interest will they have paid on the loan = $81,437.35

Answer e:

From amortization table above, loan amount outstanding after 12 months = $168,477.84

After 1-year, principal amount they have paid on the loan = $168,477.84