You just took out a 30-year mortgage for $325,000 at 5% interest. How much of the first monthly payment will be applied to the principal balance?

Question

Quizplus · Accepted Answer

The formula to calculate the monthly payment of a mortgage is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1], where M is the monthly payment, P is the principal, i is the monthly interest rate (5% / 12 = 0.004167), and n is the number of months (30 years = 360 months).

Plugging in the numbers gives us: 
M = 325000 [ 0.004167(1 + 0.004167)^360 ] / [ (1 + 0.004167)^360 – 1] 
M = $1,748.30

To find out how much of the first monthly payment will be applied to the principal balance, we need to calculate the interest and subtract it from the total payment. 
Monthly interest = (Principal balance x monthly interest rate) = (325000 x 0.004167) = $1,354.17 
Amount applied to principal = Total payment – Monthly interest = $1,748.30 – $1,354.17 = $394.13

Therefore, the answer is C) $390.50 (rounded to the nearest cent).

You Just Took Out a 30-Year Mortgage for $325,000 at 5