Assume that your aunt sold her house on December 31, and to help close the sale

Question

Assume that your aunt sold her house on December 31, and to help close the sale she took a second mortgage in the amount of $40,000 as part of the payment. The mortgage has a quoted (or nominal) interest rate of 10%, but it calls for payments every 6 months, beginning on June 30, and is to be amortized over 10 years. Now, 1 year later, your aunt must inform the IRS and the person who bought the house about the interest that was included in the two payments made during the year. (This interest will be income to your aunt and a deduction to the buyer of the house.) To the closest dollar, what is the total amount of interest that was paid during the first year?

Explanation / Answer

We have Mortgae = PV = 40000

Copuon =10% semi. So Rate = 10%/2=5%

Tenure = 10 Yrs. SO nper = 10*2 = 20 periods

SO HY Inst = PMT(Rate,nper,PV,FV)

= PMT(5%,20,-40000,0) = $3210

So Int1 = 40000*10%/2 = 2000

& Prin1 = PMT-Int1 = 1210

SO Opening Bal for LOan in Hy2 = 40000-1210=38790

So INT2 = 38970*10%/2 = 1940

So Int included in 2 payments in Y1 = 2000+1940 = 3940

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