You are planning to buy a house appraised for $350,000 and finance it through a

Question

You are planning to buy a house appraised for $350,000 and finance it through a mortgage of $250,000. You would then have a loan-to-value ratio of 0.714, safely below the cutoff by your lender of 0.80. Being securely employed, your take-home pay is $2,500 per month and have no substantial other debts. Your lender has offered you a 5.0 percent 30 year mortgage. What is the amount that you will pay per month if the mortgage payments are treated as an ordinary annuity with 12 payments per year for 30 years? For the first payment, how much is interest and how much is principal?

Explanation / Answer

formula for monthly installment payment, EMI (A)= P x r(1+r)^n/{(r+1)^n-1} in this question, P =$ 250,000 r=5/1200 = 0.004167 n= 30 years x 12 month = 360 month. Therefore A =250,000 x 0.004167(1+0.004167)^360/{(1+0.004167)^360-1} Or, A = 250,000 x 0.004167x1.004167^360/(1.004167^360-1) Or, A = 250,000 x 0.018616/3.467744 Or, A = 250,000 x 0.005638 Or, A =$1,342.05 Interest for first installment = 250,000 x 5%/12 = 1041.67 And Principal payment in the first installment = 1342.05-1041.67 =300.38

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