Home Mortgage Loan - Home Purchase Loan

DOWNPAYMENT and INTEREST RATE:

In dollars, the down payment is the difference between property value and loan amount. If value is $240,000 and the loan is $198,000, the down payment is $42,000. 

Take a 6% rate, for example, and assume a $100,000 loan. In decimals, 6% is .06, and when divided by 12 it is .005. Multiple .005 times $100,000 and you get $500 as the monthly interest payment. Suppose the borrower pays $600 this month. Then $500 of it covers the interest and $100 is used to reduce the balance. One month later, when another payment is due, the balance is $99,900, and the interest is $499.50. The interest rate stays the same, but the interest payment is lower because the balance is lower.

Two basic questions about the borrower’s ability to pay. First, is the borrower’s income large enough to service the new expenses associated with the loan, plus any existing debt obligations that will continue in the future? Second, does the borrower have enough cash to meet the up-front cash requirements of the transaction?