What is a Mortgage?
A mortgage is a loan of money that enables you to buy a house or other real estate. It's a lot of money that you'll pay back over a long time.
You may not realize it, but there are many different kinds of mortgages. In addition to conventional mortgages, there are other types of mortgages available for people who might not otherwise qualify for a loan, including people with low- and moderate-incomes, US veterans, and first-time homebuyers. The Federal Housing Administration (FHA) insures loans made to first-time homebuyers and low- and moderate-income people. The Department of Veteran's Affairs (VA) partially guarantees loans made to veterans, which is meant to encourage lenders to offer mortgages to veterans. The Rural Housing Service (RHS) is managed by the US Department of Agriculture and offers housing and loan programs that encourage rural development. For more information about these loan programs, please visit the US Department of Housing and Urban Development's Web site.
No matter what type of mortgage it is, having one is a big responsibility, but not impossible to achieve.
A mortgage payment has at least two components: Principal and interest. (You may also be responsible for insurance and other costs that are figured into your monthly payment, which is called a premium.) The principal is the original amount of the loan, and the interest is a fee that the lender charges you in exchange for loaning you money. Payments of principal and interest are broken down into monthly payments over the life of the loan. In the beginning, your monthly payments will go primarily toward paying interest. After a time, bigger percentages of your monthly payments start going toward the principal, and that's when you start building equity.
Determining the payment for a mortgage is a valuable tool in understanding the parts and basis of a mortgage. Using the formula displayed on the left, the payment for a mortgage can be calculated. First, however, several items are needed. These items are Principal (amount of money mortgaged); Interest Rate (annual charge for lending money); Length (the period, usually in years, of the mortgage.)
Using the formulas displayed on the box to the left, let's work a problem for a home mortgage. Start with a Principal amount of $ 10,000 and an annual interest rate of 5 percent. Assume the loan will be paid back on a quarterly basis over two years. How much would your quarterly payments be?
Step 1:
First, the Annual Interest Rate (5%) must be adjusted to a periodic rate in decimal form. (In this case, quarterly) This is done because the payment should include only that portion of the annual interest applicable to the period.
To calculate the quarterly rate in decimal
form, use the formula: j (quarterly interest in decimal form) =
Annual Interest Rate/(4 × 100)
The annual interest rate is 5 %. Put this value in the formula.:
Step 1 Solution: j (Quarterly interest in decimal form) = 5/ (4 × 100) = .0125
Step 2: Calculate the number of quarters the mortgage is to be repaid.
To calculate the number of quarters it takes to repay the mortgage, use the formula:
n (number of quarters for repayment) = l (Length, in years, of the mortgage) × 4
Step 2 Solution: n (Number of quarters for repayment) = 2 × 4= 8
Step 3: Calculate the discount factor. Write the formula.
| |
D = |
(1 + j)n - 1 |
| |
|
 |
|
|
j( 1 + j)n |
Step 4: Substitute .0125 for j and 8 for n.
| |
D = |
(1 + .0125)8 - 1 |
| |
|
|
| |
|
.0125( 1 + .0125)8 |
Step 5: Solve
| |
D = |
(1.0125)(1.0125)(1.0125)(1.0125)(1.0125)(1.0125)(1.0125)(1.0125) - 1 |
| |
|
|
| |
|
.0125 (1.0125)(1.0125)(1.0125)(1.0125)(1.0125)(1.0125)(1.0125)(1.0125) |
| |
D = |
.1044861 |
| |
|
|
| |
|
.0138060 |
Step 6: Now calculate the loan payment amount. Write the formula.
| |
P = |
A |
| |
|
|
| |
|
D |
Step 7: Substitute $10,000 for A and 7.56816 for D.
| |
P = |
$ 10,000 |
| |
|
|
| |
|
7.56816 |
Step 8: Solve
Once the quarterly payment is calculated, the loan can be amortized. Amortization is the liquidation of a debt by regular installments of principal and interest. An amortization schedule is a table showing the payment amount, interest, principal and unpaid balance for the entire term of the loan. The table below shows the amortization schedule for the mortgage problem just calculated.
Loan amortization schedule
|
(1)
|
(2)
|
(3)
|
(4)
|
(5)
|
(6)
|
|
Payment #
|
Balance
|
Loan
Payment
|
Quarterly
Interest
[(2) x .0125]
|
Principal
Repayment
[(3) - (4)]
|
Ending
Balance
[(2) - (5)]
|
|
|
|
|
|
|
|
|
1
|
$ 10,000.00
|
$ 1,321.33
|
$ 125.00
|
$ 1,196.33
|
$ 8,803.67
|
|
2
|
8,803.67
|
1,321.33
|
110.05
|
1,211.28
|
7,592.39
|
|
3
|
7,592.39
|
1,321.33
|
94.90
|
1,226.43
|
6,365.96
|
|
4
|
6,365.96
|
1,321.33
|
79.57
|
1,241.76
|
5,124.20
|
|
5
|
5,124.20
|
1,321.33
|
64.05
|
1,257.28
|
3,866.92
|
|
6
|
3,866.92
|
1,321.33
|
48.33
|
1,273.00
|
2,593.92
|
|
7
|
2,593.92
|
1,321.33
|
32.42
|
1,288.91
|
1,305.01
|
|
8
|
1,305.01
|
1,321.32
|
16.31
|
1,305.01
|
0.00
|
|
|
|
|
|
|
$ 10,570.63
|
$ 570.63
|
$ 10,000.00
|
|
Choose another section:
Home | Site Tour | Site Help | Site Map | Privacy Statement
