Question

Consider an "interest only” mortgage that is made for $80,000 at 5 percent interest for 20 years. The monthly payments will be constant during the life of the loan. Assume that the borrower does not make any partial repayments of principal.

a. What will the monthly payments be?

b. What will be the loan balance after 5 years?

c. lf the loan is repaid after 5 years, what will be the yield to the lender?

d. Instead of being repaid after 5 years, what will be the yield if the loan is repaid after 10 years?

Answer 1

TOTAL LOAN 80000

INTEREST RATE MONTHLY = 5/12 = 0.4166

A MONTHLY PAYMENT

P= A(1-(1+R)^-n / r

80000= A(1-(1+.00416)^-240/0.00416

80000= A(1-0.3692)/0.00416

80000=a(0.6308)/.00416

80000=A(151.63)

A=527.60

B LOAN BALANCE AFTER 5 YEARS

AT THE END 5 YEAR THE LOAN BALANCE IS RS 66784

C IF LOAN PAID AFTER 5 YEARS EFFECTIVE BALANCE

EFFECTIVE INTEREST RATE= TOTAL INTEREST/YEAR

EEFECTIVE RATE= 18441.77/80000

EEFECTIVE RATE = 23.05%

EEFECTIVE RATE P.A.= 23.05/5

P.A.= 4.61