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You have just bought a house and have a $125,000, 25-year mortgage with a fixed interest...

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You have just bought a house and have a $125,000,25-year mortgage with a fixed interest rate of 8.5 percent withmonthly payments. Over the next five years, what percentage of yourmortgage payments will go toward the repayment of principal?.

Answer & Explanation Solved by verified expert
3.8 Ratings (750 Votes)

Mortgage loan amount is always present value of monthly payments.
Step-1:Calculation of monthly payment
Monthly Payment = Loan amount / Present value of annuity of 1
= $       1,25,000 / 124.192727
= $       1,006.50
Working:
Present value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.007083)^-300)/0.007083 i 8.5%/12 = 0.007083
= 124.1927274 n 25*12 = 300
Step-2:Calculation of prinicipal repayment over next 5 years
Principal repayment over next 5 years = Monthly Payment * Present value of annuity of 1
= $       1,006.50 * 48.7416406
= $     49,058.47
Working:
Present value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.007083)^-60)/0.007083 i 8.5%/12 = 0.007083
= 48.74164062 n 5*12 = 60
Step-3:Calculation of percentage of payment towards principal
Total Repayment of loan over next 5 years = $       1,006.50 * 60 = $ 60,390.01
Loan repayment $ 49,058.47
Percentage of principal repayment towards loan = $     49,058.47 / $ 60,390.01 = 81.24%

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