Math Concepts Building an Amortization Table
Most loans that you will enter into for big ticket items (cars, houses, etc.) are not simple interest loans. These loans are amortized loans. With an amortized loan, you will pay only the simple interest on the amount you currently owe each month. As you pay off and reduce the principle, the amount of interest you pay each month is also reduced. We will see some aspects of how an amortized loans works by manually figuring out the loan amortization table below.
The set-up:
Assume that we are going to borrow $15,000 for 4 years (48 months) at 8.75% interest. The bank has determined that you will make loan payments of $371.50 per month. a) Compute interest for the first month Use the formula I= P X R X T to calculate the interest you owe for one month For the first month this is I = $15,000 X 0.0875 X (1/12) = $109.38 Put this amount into column C b) Compute the amount of the payment that will reduce the principle. The bank gets it’s interest first, so we subtract the monthly interest from your payment $371.50 - $109.38 = $262.12 this is the amount of you payment that will reduce the principle. Enter this amount into column D. c) Determine the amount of principle that you still owe. Since we used $262.12 of the first payment to reduce the principle, we still owe: $15,000 - $262.12 = $14,737.88 This number is the ―New Balance‖ (column F) and will be carried to Column A as the beginning balance for the next month. 4) Repeat from step 1 to fill out the entries for each successive month.
Loan Amortization Table
A Beginning balance $15,000 B Payment $371.50 $371.50 $371.50 $371.50 Since this is such a tedious process (imagine working this out for all 360 payments of a $250,000 30-year mortgage!), we use computers to do the math for us. Off to the computer lab! C Interest for this month D Amount Applied to principle F New Balance
Computer lab activities:
1) Start MS Internet Explorer. Most of the sites we will visit also work with Netscape, but some sites work best with MS Internet Explorer
2) Type the following address to get to my list of links: www.madison.tec.wi.us/is/ald/dwoolpert 3) Click on the 4) Click on the button. button. This page contains all of the links to the sites mentioned below.
5) Click on the first link to www.bankrate.com. We are going to get information here on current loan rates for a 30 year mortgage and a 48 month car loan. The national averages are displayed, but we want local rates, so choose ―Wisconsin‖ in the pull-down menu near the center of your window and clik ―GO‖. You will now see a table listing current Wisconsin average loan rates. Copy down the current rates for both a 30 year mortgage and a 48 month car loan.
6)
Click your ―back‖ button twice to return to http://www.madison.tec.wi.us/is/ald/dwoolpert/links_&_projects.htm
7) Click on the next link to: http://amort.netquarters.net/. This is a very handy site to quickly get a loan amortization table for any loan. 8) Use the site to get a loan amortization table for a car loan ($15,000 - $50,000) to be amortized over 4 years. Use the interest rate you got at www.bankrate.com. Leave the ―COMPOUNDING‖ choice set to ―Monthly‖. Print out your table. 9) Click on the ―back‖ button to enter a new loan. 10) Use the site to get a loan amortization table for a home mortgage ($150,000 to $400,000) to be amortized over 30 years. Use the interest rate you got at www.bankrate.com. Leave the ―COMPOUNDING‖ choice set to ―Monthly‖. Do not Print out this table (many, many pages). 11) Compare the first few payments of each loan. What do you notice? 12) Click on the ―back‖ button to enter a new loan. Play around a bit and try adjusting the interest rate and number of payments for one of your loans. Pay attention to the results in the ―Payment‖ and ―Total Interest‖ fields at the top of each amortization table. 13) Return to http://www.madison.tec.wi.us/is/ald/dwoolpert/links_&_projects.htm. Click on the third link, http://www.financialpowertools.com/amortization_calculator/. This calculator gives a different, graphical view of an amortized loan. Play around a bit using the same numbers you used in the previous calculator. 14) Return to http://www.madison.tec.wi.us/is/ald/dwoolpert/links_&_projects.htm. Scroll down and click on the sixth link, http://www.bankrate.com/yho/rate/calc_home.asp. Here you will find a wonderful set of calculators for many financial questions. 15) You may try any of the calculators on this page — we suggest that you try the following: a) Under Mortgages, click on ―Calculate your payment on any loan‖ (another amortization calculator) b) Under Autos, click on ―Which is better – a rebate or special dealer financing‖ – use the numbers from one of the cars adds that were handed out with this assignment! c) Under Credit Cards, click on ―The true cost of paying theminimum‖ d) Under Savings, click on ―Howto reach a savings goal – with scheduledpayments‖ e) Under Spending Power, click on ―How do I compare with top athletes‖ f) Under Moving, click on ―Compare the cost ofliving between two cities‖ Have fun with any of the other calculators that interest you. Links to the following are available at www.madison.tec.wi.us/is/ald/dwoolpert For current loan rates in your area: http://www.bankrate.com
Loan Amortization Calculators: http://amort.netquarters.net/ http://www.financialpowertools.com/amortization_calculator/ Just the payments, Please: http://autos.yahoo.com/auto/calcs.html Loan vs. Lease http://autos.yahoo.com/auto/calcs.html A Complete set of calculators for any loan or financial situation: http://www.bankrate.com/yho/rate/calc_home.asp Good advise if you are going to borrow money for any purpose: http://www.bankrate.com/yho/news/special/20010202a.asp