Question

A homebuyer took out a $350,000 30-year fixed rate loan at 4.5% interest with a monthly payment of $1,773.40. After making two monthly payments the principal balance of the loan will have been reduced by a total of: Select one: a. $923.53. b. $460.90. c. $957.38. d. $892.12.

Answer 1

The principal balance of the loan will have been reduced by a total of: a. $923.53.

Principal balance of loan

First step

First month's payment:

Annualized interest=$350,000 ×.045

Annualized interest = $15,750

 

First month's interest=$15,750/12

First month's interest= $1,312.50

First month's principal reduction=$1,773.40- $1,312.50

First month's principal reduction= $460.90

Remaining balance=$350,000 -$460.90

Remaining balance= $349,539.10

Second step

Second month's payment:

Annualized interest=$349,539.10 × .045

Annualized interest = $15,729.30

Second month's interest=$15,729.30/ 12

Second month's interest= $1,310.77

Second months principal reduction= $1,773.40 -$1,310.77

Second months principal reduction = $462.63

Third step

Total principal reduction after 2 payments=$460.90 + $462.63

Total principal reduction after 2 payments = $923.63

Therefore the correct option is A.

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