Ken and Bob took out $125000 mortgage at 8.75% three years ago. The amortization period was 25 years. What is their monthly payment?

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justaguide's profile pic

justaguide | College Teacher | (Level 2) Distinguished Educator

Posted on

The monthly payment for a mortgage can be calculated using the formula: M = P [ i*(1 + i)^n] / [ ((1 + i)^n)-1], where M is the monthly payment, i is the annual rate of interest divided by 12, n is the total number of payments which would be 12* number of years the mortgage is for and P is the amount borrowed.

The values given  to us here are P = 125000, i = .0875 / 12 = 7.29*10^-3, n = 25*12 = 300. I have taken the mortgage to be paid back over 25 years.

The monthly payment is 125000[(0.0875/12)*(1 + .0875/12)^300)/((1 + .0875/12)^300 - 1)]

calculate using a calculator

=> M = $1027.67

Therefore the monthly payment is $1027.67

neela's profile pic

neela | High School Teacher | (Level 3) Valedictorian

Posted on

The principle of the amortisation is P = $125000. The rate of interest is 8.75%. The period of amortisation is 25 tears.

The therefore the number of monthly instalments n = 25*12 = 300.

The monthly interest rate  x = 8.75%/12 = 0.0875/12 .

Therefore the monthly payment amount could be calculated by the formula: A = P*x(1+x)^n/{(1+x)^n - 1}.

P = $125000, x = 0.0875/12 , n = 300.

So A = $125000*(0.0875/12)(1+0.0875/12)^300/{(1+ 0.0875/12)^12 - 1}.

A= $1027.68 .

The monthly payment is $1027.67.

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