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Amortization

amortization basics

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india nesan
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260 views

Amortization

amortization basics

Uploaded by

india nesan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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LOAN PAYMENT FORMULA (also called AMORTIZATION) eee 1-(1+i)" P =loan amount i= monthly interest rate = annual rate/12 n = total number of loan pmts (5 yr loan = 5 *12 = 60 pmts) Total Amount of Loan Payments - Original Loan Amount =n*PMT -P Home Mortgage The Perez. family buys a house for $275,000, with a down payment of $55,000. They take out a 30-year mortgage for $220,000 at an annual interest rate of 6%. (a) Find the amount of the monthly payment needed to amortize this loan. SOLUTION Hore P = 220,000 and the monthly interest rat 0.06/12 = ‘The umber of monthly payments is 12(30) = 360. Therefore, 0.005." _ 220,000(.005) = 1319.01 1-(.005)°" Monthly payments of $1319.01 are required to amortize the loan, (b) Find the total amount of interest paid when the loan is amoxtized over 30 years. SOLUTION The Perez family makes 360 payments of $1319.01 each, for a total of $474,843.60. Since the amount of the foan was $220,000, the total interest paid is $474,843.60 — $220,000 = $254,843.60. This large amount of interest is typical of what happens with a long mortgage. A 15-year mortgage would have higher payments but would involve significantly less interest, Nonet use ten eet Loan Payment Worksheet ‘The purpose of this worksheet isto introduce the loan payment formula and fo explore several practical applications. 7. Suppose that you have student toans totaling $12,000 when you graduate from college. You will pay these loans off with monthly payments at 8% APR. (2) if you want to pay the loan offin 15 years how much should you pay per month? (®) How much would your monthly payments be if you wanted to pay your loans off in 10 years? (c) Calculate the total amount of money that you spent to pay off the loan in parts (a) and (b). Note how much larger each calculation is than the original loan amount of $12,000. (2) Finally, suppose that you are able to pay off $2,000 of your loan right after school, reducing the ‘amount of the loan to $10,000, Now how much should your monthly payments be in order to pay off the loan in 10 years? 2. Suppose that you are buying a $7,000 used car and are shopping around for loans. You find the following 3 options, each with monthiy payments: Duration APR Option 1: 4 years 9% Option 2: 5 years 10% Option 3: 6 years 11% Using this information, answer the following questions. (a) Calculate the monthly payment for each of the loans. Which loan looks like the better deal? (b) Calculate the amount of interest that you paid on each of the loans using the following formula: Interest = Amount Paid - Principal Now which loan looks like the better deal?

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