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Interest Due and Loan Amortization - Prof. Thomas Thomson, Study notes of Real Estate Management

University of Texas - San AntonioReal Estate Management
Prof. Thomas Thomson

An explanation of interest due, its calculation, and the application of payments to loan balances. It also covers the concept of loan amortization and how to use a calculator for amortization calculations.

Typology: Study notes

Pre 2010

Uploaded on 07/30/2009

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Copyright ©2008 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Professor Thomson
Fin 3433
Chapter 16:
Professor Thomson
Fin 3433
Chapter 16:
Additional
Material
Additional
Material
16-2
Interest Due
Interest Due is the mirror image of interest
earned
In Principles of Finance you learned that
interest earned is:
•Interest rate * Amount Deposited
Interest due is:
•Interest rate * Amount Borrowed
16-3
Periodic Interest Rate
The periodic interest rate is the Note Rate
divided by the periods per year
For mortgages, the period is usually one
month (12 periods per year)
The monthly interest rate charged can then
be computed as:
•Rate%/1200
16-4
Interest Due Example
You borrowed $250,000 last month at 6
3/8%. How much interest is due now?
250,000*6.375/1200 = 1328.13
If you make a payment more than 1328.13,
you will be “amortizing” your loan
If you make a payment less than 1,328.13
you will have negative amortization, or more
pleasantly called, positive accrual
16-5
Application of payments to loan balances
Your loan contract will specify the use of
payments on your loan. Typically money
will first be used to make up any arrears in
payments or any penalties you have
incurred
If you are paying according to schedule,
your payment will first be applied to interest
due.
Any amount of your payment that exceeds
the interest due will be used to amortize
(pay down) the principal
16-6
Amortization Example
For the previous Interest Due example, say
you made of payment of $1500.
First the 1328.13 interest would be
subtracted from your payment and the
remaining amount (1500 – 1328.13 =
171.88) would be used to pay down the
principal. Your new principal amount would
be
250,000.00 – 171.88 = 249,828.12
pf2

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Download Interest Due and Loan Amortization - Prof. Thomas Thomson and more Study notes Real Estate Management in PDF only on Docsity!

McGraw-Hill/Irwin Copyright © 2008 by the McGraw-Hill Companies, Inc. All rights reserved.

Professor Thomson

Fin 3433

Chapter 16:

Professor Thomson

Fin 3433

Chapter 16:

Additional

Material

Additional

Material

16-

Interest Due

ƒ Interest Due is the mirror image of interest earned ƒ In Principles of Finance you learned that interest earned is:

  • Interest rate * Amount Deposited ƒ Interest due is:
  • Interest rate * Amount Borrowed

16-

Periodic Interest Rate

ƒ The periodic interest rate is the Note Rate divided by the periods per year ƒ For mortgages, the period is usually one month (12 periods per year) ƒ The monthly interest rate charged can then be computed as:

  • Rate%/

16-

Interest Due Example

ƒ You borrowed $250,000 last month at 6 3/8%. How much interest is due now? ƒ 250,000*6.375/1200 = 1328. ƒ If you make a payment more than 1328.13, you will be “amortizing” your loan ƒ If you make a payment less than 1,328. you will have negative amortization, or more pleasantly called, positive accrual

16-

Application of payments to loan balances

ƒ Your loan contract will specify the use of payments on your loan. Typically money will first be used to make up any arrears in payments or any penalties you have incurred ƒ If you are paying according to schedule, your payment will first be applied to interest due. ƒ Any amount of your payment that exceeds the interest due will be used to amortize (pay down) the principal 16-

Amortization Example

ƒ For the previous Interest Due example, say you made of payment of $1500. ƒ First the 1328.13 interest would be subtracted from your payment and the remaining amount (1500 – 1328.13 = 171.88) would be used to pay down the principal. Your new principal amount would be ƒ 250,000.00 – 171.88 = 249,828.

16-

Loan Amortization

ƒ If your loan payment and interest rate are constant, your calculator can do the amortization calculations for you. ƒ If your loan payment changes every month, and if the interest rate changes every month, you will need to do a month by month amortization of the loan which allows for these changes.

16-

Calculator hints

ƒ Clear the calculator before new problems (Use the J C ALL ) ƒ Make sure:

  • The desired number of decimal places are displayed - Set using J DISP followed by entering a digit
  • You have the correct payments (periods) per year
    • Set by typing a number then press J P/YR
    • Check by holding down J C ALL

16-

Calculator hints (continued)

BEGIN indicator is not displayed, unless you are told this problem has beginning of period cash flows

  • Set using J BEG/END If you have a comma where you should have a decimal point (European notation) then toggle to decimal by:

• Toggle using J ./,

16-

Notation when using Calculator

ƒ P/YR = 12 (indicate the periods per year) ƒ PMT(PV=-270,000, I/Yr = 6, N=180) = 2278. ƒ Order of inputs does not matter ƒ Negative sign for PV indicates a cash outflow ƒ N = number of periods ƒ I/YR = stated annual interest rate ƒ The last button one pushes is what you want to solve for: in this case PMT.

16-

Amortization function on Calculator

ƒ One sets up the Amortization table in the calculator by entering the starting period and pressing the INPUT key, and then entering the ending period and pressing the

J AMORT key.

ƒ Press the = key to cycle through the principal paid, the interest paid, and the ending balance.

16-

Amortization Example

ƒ For the previous example, how much interest will be paid in the second year? ƒ First solve for the monthly payment

  • PMT(PV=-270,000, I/Yr = 6, N=180) = 2278. ƒ Then:
  • 13 INPUT
  • 24 J AMORT ƒ Press the = sign twice to get the interest pay during the second year of 15,182.