This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: 1 Equity and Interest Payments on a Loan Previous Example: Home Mortgage Price of home: $220,000 Down payment: $20,000 Loan (home mortgage): $220,000  $20,000 = $200,000 Duration of loan: 15 years = 180 months Interest rate: 7.2% per year, compounded monthly Payment frequency: monthly 1 2 A A A A 179 180 months P = $200,0000 IOE 201 Lecture Notes 7 2  + + = 1 ) 1 ( ) 1 ( N N i i i P A Monthly payment Loan (home mortgage) P = $200,000 Duration of loan N = 180 months Interest rate i = 7.2% per year = 0.072/12 = 0.006 per month  + + = 1 ) 006 . 1 ( ) 006 . 1 ( 006 . 000 , 200 $ 180 180 = $1,820 • Of this $1,820 per month, a portion is paid against the principal ( equity payment ), and a portion is paid against the interest ( interest payment ). • The two portions vary with each month’s payment. • The sum of the two portions is the total monthly payment ($1,820) Equity and Interest Payments on a Loan 3 Equity and Interest Payments on a Loan Loan (home mortgage) P = $200,000 for 15 years Interest rate i = 0.006 per month Monthly payment A = $1,820 Month 1: Interest on the principal at the end of 1 st month is $200,000 × 0.006 = $1,200 Therefore, out of 1 st payment of $1,820 : • Interest payment = $1,200 , and • Payment against principal = $1,820  $1,200 = $620 Month 2: Unpaid principal left after 1 st payment is $200,000  $620 = $199,380 Interest on unpaid principal at the end of the 2 nd month is $199,380 × 0.006 = $1,196.28 • Interest payment = $1,196.28 , and • Payment against principal = $1,820  $1,196.28 = $623.72 4 Equity and Interest Payments on a Loan Loan (home mortgage) P = $200,000 for 15 years Interest rate i = 0.006 per month Monthly payment A = $1,820 Month 3: Unpaid principal left after 2 nd payment is $199,380  $623.72 = $198,756.28 Interest on unpaid principal at the end of 3 rd month is $198,756.28 × 0.006 = $1,192.54 • Interest payment = $1,192.54, and • Payment against principal = $1,820  $1,192.54 = $627.46 With each subsequent month’s payment of $1,820: • interest payment goes down •...
View
Full Document
 Fall '09
 DennisBlumenfield
 PAYBACK PERIOD, Payment, unpaid principal

Click to edit the document details