On June 1, you borrowed $212,000 to buy a house. The mortgage rate is 8.25 percent. The loan is to be repaid in equal monthly payments over 15 years. The first payment is due on July 1. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year.)

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The correct answer is A.The monthly interest rate is 8.25% / 12 = 0.6875%. The monthly payment is $212,000 * 0.6875% * (1 + 0.6875%)^180 / ((1 + 0.6875%)^180 - 1) = $1,453.38. The principal balance after the first payment is $212,000 - $1,453.38 = $210,546.62. The second payment is $1,453.38, of which $1,453.38 - $210,546.62 * 0.6875% = $603.32 applies to the principal balance.

On June 1, You Borrowed $212,000 to Buy a House