So, after the first payment, you have paid $416.67 in interest and $120.15 in principal. The first month’s interest is (1/12)*5% of $100,000 (that is, the interest is paid monthly, so you pay one-twelfth of 5% each month), which is $416.67. The result of the bank’s calculation is thatthe monthly payment is $536.82. The bank does a calculation to determine your monthly payment, using the amount of principal, theinterest rate, the amount of time you have to pay off the loan, and the assumption that all monthly payments should be the same amount. For example, the initial balance is $100,000. That is, the initial principal, $100,000, is paid back in 360 installments (once a month for 30 years), with interest on the unpaid balance. You must pay back both principal and interest. That means that First National Bank of DC gives you $100,000 to pay the balance on your house, and you pay First National back at a rate of 5% per year over a period of thirty years. Thus, you take out a $100,000 mortgage with First National Bank of DC for thirty years at 5% interest. For example, you purchase a $150,000 house and make a $50,000 down payment. FMCO makes money by purchasing loans from banks and then selling them to investors. The requirements listed in this document are not real Fannie Mae requirements and do not in any way represent Fannie Mae policy or procedure. Thus, the “customer” is a mythical corporation named “Federal Mortgage Consolidation Organization,” (FMCO) but the product description is based loosely on reality. Consequently, the banks often sell their loans to consolidating organizations such as Fannie Mae and Freddie Mac, taking less long-term profit in exchange for freeing the capital for use in other ways.This application, called the Loan Arranger, is fashioned on ways in which organizations such as Fannie Mae (formerly known as the Federal National Mortgage Association, a federally-chartered for-profit corporation) handle the loans they buy from banks. Although the income from interest on these loans is lucrative, the loans tie up money for a long time, preventing the banks from using their money for other transactions. However, long-term property loans, such as mortgages, typically have terms of 15, 25 or even 30 years. Loan Arranger Requirements SpecificationBackgroundPurposeUsersGlossaryPreconditions and AssumptionsFunctional RequirementsAppendix A - Computing Loan InterestVersion 2.1 Loan Arranger Requirements SpecificationBackgroundBanks generate income in many ways, often by borrowing money from their depositors ata low interest rate, and then lending that same money at a higher interest rate in the form of bank loans.
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