Question

1. You are considering purchasing a house for $225,000. Do a three-month loan amortization and calculate the total finance charge. Assume a 20 % down payment.

Do a three-month loan amortization table on a 20 year loan at a 5.25% rate with one point paid.

Beginning Bal. Payment Principal Interest Ending Bal.

2. Calculate the total finance charge for this loan.

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Answer 1

Answer 1
Three-month loan amortization table
Month	Beginning bal.	Payment	Principal	Interest	Ending bal.
a	b	c	d = c-e	e = (b x 5%)/12	f = b-d
1	$180,000.00	$1,187.92	$437.92	$750.00	$179,562.08
2	$179,562.08	$1,187.92	$439.74	$748.18	$179,122.34
3	$179,122.34	$1,187.92	$441.58	$746.34	$178,680.76
Answer 2
Total Finance charge on loan = (Loan tenure in months x Monthly payment) - Original Loan amount
Total Finance charge on loan = (240 months x $1187.92) = $180000 = $1,05,100.88
Working
Calculation of monthly payment on loan
We can use the present value of annuity formula to calculate the monthly loan payment.
Present value of annuity = P x {[1 - (1+r)^-n]/r}
Present value of annuity = Loan amount = Purchase cost of house - down payment = $225,000 - ($225,000 x 20%) = $1,80,000
P = monthly payment = ?
r = interest rate per month = 5.00%/12 = 0.004167
n = number of monthly payments = 20 years x 12 = 240
180000 = P x {[1 - (1+0.004167)^-240]/0.004167}
180000 = P x 151.53
P = 1187.92
Monthly payment = $1,187.92
Note : Interest rate 5.25% with one point paid means effective interest rate would be 5%.