Determine the annual repayment schedule for the first two years (i.e. interest,

Question

Determine the annual repayment schedule for the first two years (i.e. interest, principal payment, and balance owed) for each of the following. (Assume that only one payment is made annually.) Compare the payments required by each mortgage. What conclusions can you draw?

a) A $100,000 conventional mortgage for 25 years at 5 percent
b) A $100,000 conventional mortgage for 20 years at 5 percent
c) A $100,000 conventional mortgage for 25 years at 6 percent

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Explanation / Answer

a) A $100,000 conventional mortgage for 25 years at 5 percent

Payment 7095.25 Interest 5000.00 Principal 2095.25 Balance 97904.75

Payment 7095.25 Interest 4895.24 Principal 2200.01 Balance 95704.74

b) A $100,000 conventional mortgage for 20 years at 5 percent

Payment 8024.26 Interest 5000.00 Principal 3024.26 Balance 96975.74

Payment 8024.26 Interest 4848.79 Principal 3175.47 Balance 93800.27

c) A $100,000 conventional mortgage for 25 years at 6 percent

Payment 7822.67 Interest 6000.00 Principal 1822.67 Balance 98177.33

Payment 7822.67 Interest 5890.64 Principal 1932.03 Balance 96,245.30

Conclusions: Even a 1% increase in interest significantly changes how much principal one is able to pay annually in the first two years. Reducing the term by 5 years significantly increases the amount of principal one can pay in the first two ears.

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