A Mortgage Example
Remember the mortgage formula for a principal P, an interest rate j and a
Pj1  j 
n
term n is
n
1  j   1
.
Example 1
Let us borrow $100 000 and repay it over 30 years at an interest rate of 6%

per annum calculated monthly. Firstly we convert the interest rate to a
monthly rate
0.06
 0.005 and the term to a monthly term of 12  30  360
12
months. We can now calculate the monthly payment needed on the loan. It is
$100 000(0.005)1  0.005 

360
1  0.005  1
360

 $599.55 per month.
Example 2

Let us look at the effect of a drop in interest rate of 1%. The monthly interest
__
0.05
 0.0041 6 and our monthly payment is reduced to
rate is now
12
__
__



$100 000 0.0041 6 1  0.0041 6



 $538.48 per month.
360
__



1  0.0041 6  1


360
In this example we see the power of the interest rate to have an effect on

the monthly payments on a loan.