LOANS

1
LOANS

• Funds received from a loan PRINCIPAL (amount of
  loan)
  
• Principal will be repaid by a series of equal
  payments (PMT)
  
• PMT includes repayment of principal and interest
  charges
  
• Principal PV (sum of PMTS with interest backed
  out)

2
Monthly Repayments

• Most loans involve monthly payments
• P/Y needs to be set on 12 for monthly payments
• N total number of monthly payments
• Lenders charge interest monthly
• C/Y needs to be set on 12
• I stated annual rate (whole number)

3
Mortgages

• Loan to buy a property
• Lender holds title to property until loan is paid
  off
  
• Borrower normally has to pay part of purchase
  price in cash - Down Payment
  
• Down payment is of loan (e.g.20)

4
Example 1

• Purchase price 250,000
• Down payment requirement 20
• Length (term) of loan 30 years
• Interest rate annual rate of 8, compounded
  monthly
  
• Find monthly payment

5

• P/Y and C/Y 12
• N 30 x 12 360 monthly payments
• I/Y 8
• PV 250,000 x .80 (-)200,000
• PMT ?
• FV 0
• PMT 1,467.53

6
Escrow

• Monthly payment P I
• Some lenders require payments for an escrow
  account in addition to P I
  
• Property taxes and homeowners insurance are paid
  from the escrow account
  
• Total pmt P, I, Escrow

7

• If you have a fixed interest rate loan, monthly
  payment for P I stays constant
  
• Escrow is adjusted as taxes and insurance rates
  change
  
• Total monthly payment usually goes up each year

8
Qualifying for a Mortgage

• As a rule of thumb, lenders say your total
  monthly debt should not exceed 1/3 of your gross
  monthly income
  
• Total monthly debt includes credit cards, car
  loans, student loans, etc. as well as the mortgage

9
Total Interest Paid over Loan

• Amount of monthly payment x total number of
  payments total paid on loan
  
• Total paid - principal borrowed total interest
  paid over life of loan
  
• Often pay more in interest than you borrowed in
  principal

10
Splitting PMT into P I

• How does lender know how much of your monthly
  payment to use to repay principal and how much
  its getting for interest charges?
  
• How monthly payment split between P I
  Amortization Schedule

11
Format of Amortization Schedule

• Month
• Beginning Balance (Principal)
• PMT
• Interest (Monthly rate x BB)
• Principal Repaid (PMT - Interest)
• Ending Balance (BB - Princ. Repaid)

12
Amort. Schedule on Calculator

• Must first solve for payment
• 2nd AMORT, 2nd CLR WORK
• P1 1st PMT to consider
• P2 last PMT to consider
• BAL Payoff Principal still owed
• PRN Principal repaid to date
• INT Interest paid to date

13
Example 1 Continued

• Suppose we want to sell the house after 12 years.
  What will be the payoff?
  
• P1 1
• P2 12 x 12 144
• BAL (Payoff) 167,724.78

14
Example 1 Continued

• Suppose we want to know how much interest we paid
  during Year 5?
  
• P1 49 (start of Year 5)
• P2 60 (end of Year 5)
• INT 15,311.99