Problem: Preparing an amortization table is one of the more tedious time value of money applications. Using a spreadsheet makes it relatively easy, but there are also websites available that will prepare an amortization table very quickly. One such site is www.bankrate.com. The website has a mortgage calculator for home loans, but the same calculations apply to most other types of loans such as car loans and student loans. College graduates in 2013 left school with an average of $28,400 in student loans. Suppose you graduate with the average student loan and decide to pay the loan off over the next 15 years at 6.8 percent, the maximum interest rate for unsubsidized Stafford loans. What are your monthly payments? Using the calculator, for the first year, we get:
As you can see, the monthly payment will be $252.10. The first payment will consist of $91.17 in principal and $160.93 in interest. Over the life of the loan you will pay a total of $16,978.40 in interest.
Questions: 1. Suppose you take out a 30-year mortgage for $250,000 at an interest rate of 6.8 percent. Use this website to construct an amortization table for the loan. What are the interest payment and principal amounts in the 110th payment? How much in total interest will you pay over the life of the loan?
2. You take out a 30-year mortgage for $275,000 at an interest rate of 7.3 percent. How much will you pay in interest over the life of this loan? Now assume you pay an extra $100 per month on this loan. How much is your total interest now? How much sooner will the mortgage be paid off?