IOE+201+Notes+7 - 1 Equity and Interest Payments on a Loan...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the 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 months 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 months payment of $1,820: interest payment goes down...
View Full Document

Page1 / 18

IOE+201+Notes+7 - 1 Equity and Interest Payments on a Loan...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online