A Mortgage Example  

A Mortgage Example Remember the mortgage formula for a principal P, an interest rate j and a Pj1  j 

n

term n is

n 1  j   1

.

Example 1 Let us borrow $100 000 and repay it over 30 years at an interest rate of 6%  per annum calculated monthly. Firstly we convert the interest rate to a monthly rate

0.06  0.005 and the term to a monthly term of 12  30  360 12

months. We can now calculate the monthly payment needed on the loan. It is $100 000(0.005)1  0.005   360 1  0.005  1

360

  $599.55 per month.

Example 2 

Let us look at the effect of a drop in interest rate of 1%. The monthly interest __ 0.05  0.0041 6 and our monthly payment is reduced to rate is now 12

__ __    $100 000 0.0041 6 1  0.0041 6     $538.48 per month. 360 __    1  0.0041 6  1   360

In this example we see the power of the interest rate to have an effect on



the monthly payments on a loan.