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Finance 254
Mortgage Amortization Example
To get an understanding of amortization, consider a $200,000 mortgage loan with a 5.375% APR.
Note, unless told otherwise, always assume mortgages have monthly payments, fixed interest rates, and
last for 30 years.
Our first step is to calculate our monthly payment, which turns out to be $1,119.94.
Now, consider the first month of this loan.
We are borrowing $200,000 and have to pay a 5.375%
APR on that loan, with the payments occurring every month.
How much do we owe in interest for the
first month?
The first month’s interest is calculated as:
$895.83
12
0.05375
$200,000
Interest
=
⋅
=
So, when the first monthly payment is made, $895.83 of the $1,119.94 payment is dedicated to
paying the lender interest on the loan amount.
Where does the other portion of the payment go?
It goes
to repaying the principal.
So, the outstanding loan balance reduces to: $200,000  $224.11 = $199,775.89.
What are the interest and principal portions of the ninth month’s payment?
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 Fall '09
 FIN221

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