Mortgage Math.pptVIP

Mortgage Math What is PV of $1000 per month for 15 months plus $10,000 paid 15 months from now at 10% nominal annual interest? = (14.045)1000 + (0.8830)10000 = $14,045 + $8,830 = (PVIFA.00833,15)*PMT + (PVIF.00833,15)*FV How the Calculator Mortgage Math Keys Work. . . The five mortgage math keys on your calculator (N,I,PV,PMT,FV) solve: or:0 = -PV + (PVIFAr,N)*PMT + (PVIFr,N)*FV where: r = i / m, where: i = Nominal annual interest rate m = Number of payment periods per year (m?P/YR). Example: 10%, 20-yr fully-amortizing mortgage with payments of $1000/month. The calculator solves the following equation for PV: The result is: PV = 103625. THE BASIC RULES OF CALCULATING LOAN PAYMENTS BALANCES Let: P = Initial Contract Principal (Loan Balance at time zero, when money is borrowed) rt = Contract Interest rate (per payment period, e.g., =i/m) applicable for payment in Period t“ IEt = Interest portion of payment in Period t“ PPt = Principal paid down (amortized) in the Period t payment OLBt = Outstanding loan balance after the Period t payment has been made PMTt = Amount of the loan payment in Period t“ THE FOUR BASIC RULES: IEt = rt(OLBt-1) PPt = PMTt – IEt OLBt = OLBt-1 - PPt Equivalent to PV of remaining loan payments OLB0 = P Know how to use these rules so that you can calculate payment schedule, interest, principal, and outstanding balance after each payment, for any type of loan that can be dreamed up! APPLICATION OF THE FOUR RULES TO SPECIFIC LOAN TYPES Fixed-Rate loans (FRMs): The contract interest rate is constant throughout the life of the loan: rt=r, all t. 2) Constant-Payment loans (CPMs): The payment is constant throughout the life of the loan: PMTt=PMT, all t. 3) Constant-Amortization loans (CAMs): The principal amortization is constant throughout the life of the loan: PPt=PP, all t. 4) Fully-Amortizing loans: Initial contract principal is fully paid off by maturity of loan: ?PPt=P over all t=1,…,N. 5) Partially