if you borrow $120,000 at an APR of 7% for 25 years, you will pay $848.13 per month.

Question

what in the interest paid?

Answer 1

Kristina,

First, the monthly payment is slightly off here, perhaps because of rounding. Using the Excel PMT function with your numbers, I find that the monthly payment is $848.13504, or $848.14 per month.

= PMT(.07/12, 25*12, 120000,,0) --> $848.13504

To your question about the interest paid over the life of the loan, though, we do not even need to know the monthly payment because the interest paid is based on the loan amount, the interest rate and its compounding periods, and the total number of periods (payments or months, in this case).

So, here is our setup:

Principal = $120,000

Interest rate = 7%, monthly payments

Duration of loan = 25 years, monthly payments

We can then use the Excel/Google Sheets function CUMIPMT to determine the cumulative interest paid. This function works like this:

=CUMIPMT(rate, nper, pv, start, end, type)

In this function, the variables mean the following:

Rate = annual interest rate broken into applicable compounding periods

Nper = number of periods (years) broken into applicable compounding periods

PV = present value, or the amount you borrowed (value of the loan)

Start = the first period of interest for which you want to calculate the total paid

End = the last period of interest for which you want to calculate the total paid

Type = whether the payments occur at the beginning or end of each payment period. I assume the end of each period for this example.

Note that "start" and "end" essentially set up the timeframe in which you want to calculate the interest paid. So, for your example, we will use 1 for the start period (the first payment) and 300 for the end period (the last payment) because we want to know the total interest paid over the whole loan. However, we could use different start and end periods if we wanted to know how much interest you paid in year 2, for example (start = 13, end = 24). Note that we are using month numbers here because your loan is paid monthly. If the loan were paid yearly, then we would use year numbers.

So, here is what our function in Excel looks like with our actual numbers:

=CUMIPMT(.07/12, 25*12, 120000, 1, 300, 0)

.07/12 = the annual interest rate divided by the number of payments per year

25*12 = the number of years multiplied by the number of payments per year

120000 = the loan amount

1 = the first period for which we want to calculate the interest

300 = the last period for which we want to calculate the interest

0 = payments occur at the end of each period (month)

Then, simply press enter and get your result: $134,440.51

Note that Excel/Sheets will display this as a negative number because you are paying that amount, so it is leaving your pocket.

I hope that answer helps.