Simple Interest
Interest calculations use the formula:
loan balance X rate of interest = annual interest
- A loan of $15,000 is repaid in full, one year after the loan is made. If the interest rate on the loan is 12.5%, what amount of interest is owed?
Solution Step 1 Principle x interest rate = interest dollars Calculation – $ 15,000 x 12.5% = $1,875 Interest Dollars
Answer: $1,875 interest
Principal and Interest
- On October 1, a mortgagor makes a $300 payment on her mortgage, which is at the rate of 10%. Of the $300 total payment for principal and interest, the mortgagee allocates $200 to the payment of interest. What is the principal balance due on the mortgage on the date of the payment?
Solution Step 1 — Monthly Interest x 12 = Annual Interest
Calculation – $200 x 12 = $2,400
Solution Step 2 — Interest $/Interest Rate – Principal Balance
Calculation – $2,400/10% (.10) = $24,000 – Principal Balance
Answer: $24,000 mortgage balance on date of payment
- If an outstanding mortgage balance is $16,363.64 on the payment date and the amount of the payment applied to interest is $150, what is the rate of interest charged on the loan?
Solution Step 1 — Monthly Interest x 12 = Annual Interest
Calculation – $150 X 12 mo = $1,800 annual interest
Solution Step 2 – Rate = Interest Dollars/Principal
Calculation – $1,800/16,363.64 = 11% Interest Rate
Debt Service
- A mortgage loan of $50,000 at 11% interest requires monthly payments of principal and interest of $516.10 to fully amortize the loan for a term of 20 years. If the loan is paid over the 20-year term, how much interest does the borrower pay?
Solution Step 1 Monthly Principal & Interest pmts x 12 = Annual Princ & Int Pmts
Calculation – $516.10 x 12 = $6,193.20
Solution Step 2 — Annual P&I x 20 = Total 20 year principal & interest pmts Calculation – $6,193.20 x 20 = $123,864
Solution Step 3 — Total P&I Pmts less Original Loan = Interest Dollars
Calculation – $123,864 – $50,000 = $73,864
Answer: $73,864 interest paid
Fees and Points
The formula for calculating the dollar amount owed in points on a loan is: loan X number of points (percentage) = dollars in points
- A house sells for $60,000. The buyer obtains an 80% loan. If the bank charges 3 points at closing, how much in points must the buyer pay?
Solution Step 1 — Determine the loan Amount — Selling Price x LTV
Calculation – $60,000 x80% = $48,000 Loan
Solution Step 2 — Multiply points times Loan = Point Payment Calculation – $48,000 x 3% (.03) = $1,440 Points Payment
Answer: $1,440 points payment
- and Mrs. Schmidt borrow $64,000. If they pay $4,480 for points at closing, how many points are charged?
Solution Step 1 — Divide the Point Dollars by the Loan Dollars = Percent of Loan Calculation – $4,480/$64,000 = 7%
Solution Step 2 — Each Percentage of the loan equals 1 point
Calculation — 7% = 7 Points
Answer: 7 points
- and Mrs. Ortega borrow $55,000 at 11% interest for 30 years. The bank requires 2 months interest to be placed in escrow and a 1% loan origination fee to be paid at closing. What is the amount of interest to be escrowed? What is the amount charged for the loan origination fee?
Solution Step 1 — Annual interest = Principal x Interest Rate
Calculation – $55,000 x 11% = $6,050 Annual Interest
Solution Step 2 — Annual interest divided by 12 = monthly interest
Calculation – $6,050/12 = $504.17 Monthly Interest
Solution Step 3 — 2 x monthly interest = Two Months Interest Escrow
Calculation — 2 x $504.17 = $1,008.34 – Interest Escrow
Answer 1: $1,008.34 interest escrow
Solution Step 1 — Loan times Origination Fee Percentage = Origination Fee Dollars
Calculation $ 55,000 x 0.01 = $ 550.00 -Loan origination fee
Answer: $550 loan origination fee
Loan-to-Value Ratios
- In problem 8 above, the appraised value of the home purchased is $68,750. What is the
loan-to-value ratio?
Solution Step 1 — Loan divided by Selling Price = Loan to Value Ratio
Calculation – $55,000/68,750 = 80% Loan to Value Ratio
Answer: 80% loan-to-value ratio
