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Unformatted text preview: ll be credited to principal reduction. First, the interest payment. we calculate the amount of interest that would be charged on the loan amount for a full year. $85,000 X 8.0% = $6,800 Because we only need the amount for 1 month, we divide this amount by 12 months or $6,800 / 12 = $566.67 Therefore, the interest payment for the first payment would be $566.67 and the remainder of the total payment of $631.13 – that is, $631.13 minus $566.67 or $64.46 – would be credited to principal reduction. Thus, the balance on the loan would be the original loan amount minus the $64.46 or $84,935. If you would like to calculate the amount of principal reduction for the second payment you would follow the same steps of multiplying the new loan amount by the annual interest rate of 8.0 percent (0.08) to get the annual interest that would be paid, dividing that answer by 12 to get the monthly interest, then subtracting that amount from the total P & I payment of $631.13, giving the amount that would go to principal reduction: 1. 2. 3. Annual interest: $84,935.54 x 8.0% = $6,794.84 Monthly Interest Charge: $6794.85 / 12 =$566.24 Principal Reduction: $631.13 – $566.24 = $64.89 Dynasty School (www.dynastySchool.com) 9-3 REAL ESTATE FINANCE
These calculations show that in the first years of the loan the major portion of each payment goes to the payment of interest. Many times a borrower will ask, “How much will I pay back on my loan?” This is simple to calculate. Multiple the monthly payment for P & I times the total number of payments, or in this example $631.13 x 360 monthly payments for a total of $227,206.80 or approximately four times the amount borrowed. To calculate the amount of interest that would be paid over the term of the loan, subtract the original loan amount from the total amount repaid or $227,206.80 – $85,000 $142,206.80 With these simple steps and the monthly payment factors, a real estate professional can calculate the above for any fixed–rate (from 7 to 17 percent), fixed–term (15–, 20–, 25–, or 30–year) mo...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10