Question

12. you are borrowing $1 million to buy your dream home, taking a 30 -year mortgage at 6% per year and undertaking to make equal monthly payments at the end of each month for 30 years to amortize the loan. What is your monthly payment, interest portion of your first payment and principal portion of your first payment?

Answer 1

Amount borrowed (PV) = $1,000,000

No of monthly installments (N) = 360

Interest rate per month (i) = 6% / 12 = 0.50% p.m.

Monthly installment (PMT) = ??

Using financial calculator or PMT function in excel,

Monthly installment (PMT) = $ 5,995.51

interest portion in 1st payment = loan Amount outstanding at the beginning of 1st payment x monthly interest rate

interest portion in 1st payment = 1000,000 x 0.5% = $5,000

Therefore principal portion of first payment = payment - interest portion = $ 5,995.51 - $ 5,000 = $ 995.51

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