Business Mathematics

Governor Pack Road, Baguio City, Philippines 2600

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – BUS MATH Subject Teacher: JOAN A. MALA

MORTGAGE AND AMORTIZATION

Learning Objectives:
At the end of this module, student must be able to:
a. illustrate how interest is computed and applied on mortgage, amortization, services/utilities,
deposits, and loans

MORTGAGE and AMORTIZATION DEFINITION

When purchasing real estate like houses or buildings, there is a way to make the purchase
without having to pay for the whole cost of the property immediately. Such process is called
mortgage. A mortgage can be defined as an agreement by which a debtor pays the lender (usually
a financial institution like a bank) for a certain property over a period of time. It is also defined as a
legal agreement by which a bank or other creditor lends money at interest in exchange for taking
title of the debtor's property, with the condition that the conveyance of title becomes void upon the
payment of the debt. In most contexts, however, the term mortgage can also refer to the loan itself.
Sometimes it is also called the principal amount of the loan.

An important consideration in a mortgage is that, unlike in other loans or debts, an actual

physical entity, which is the property itself, serves as the security or collateral for mortgage loans. If
the borrower fails to pay for the loan, the collateral (which is the property) will be forfeited.

To further illustrate the concept of mortgage, consider this situation. Suppose you have saved
₱200,000 and you are planning to buy a house that costs ₱1,000,000. Since your savings is not enough
to fully pay for the house in cash, you can apply for a mortgage from a bank. Your savings can be
used as a down payment, and then you can pay the remaining balance to the bank using the house
as a collateral. The remaining balance, which is the amount loaned from the bank, is the mortgage.
So in this situation, the mortgage (which we denote as M) is the difference between the cost of the
house and the down payment; that is

M = ₱1,000,000 – ₱200,000
M = ₱800,000

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 Business Mathematics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – BUS MATH Subject Teacher: JOAN A. MALA

When the bank approves your mortgage loan, you can pay it back to the bank on a periodic,
installment basis. The amount that you need to pay based on the agreed upon schedule – for
example, on a monthly basis – is called the amortization. Amortization may be thought of as a
process of dividing the value of a loan by paying a certain fixed amount periodically. The payment
schedule and the period during which you have to fully pay the bank in order to acquire the
property are based on the agreement between both parties. The bank earns by charging an interest
on your loan. To determine the periodic payment that a borrower needs to settle based on the
mortgage and payment terms that a bank applies, we can use the formula that follows.

General Formula in Calculation the Periodic Payment for a Mortgage

Let P be the principal amount, r be the interest rate, n be the number of payments per year,
and t be the number of years during which the mortgage will be paid. Then the periodic
payment PM can be calculated using the following formula:
𝑟
𝑃(𝑛)
PM = 𝑟 −𝑛𝑡
1−( 1+ )
𝑛

Observe that when we need to determine the monthly amortization for a mortgage, we just
need to use n = 12 in the given formula; hence, the formula will become:

𝑟
𝑃( )
12
PM = 𝑟
1−( 1+ 12 )−12𝑡

Also, take note that in this particular case, the interest is assumed to be compounded monthly.
The next example demonstrate how this formula is used.

EXAMPLE 1. Determining the Monthly Payment for a Mortgage.

Suppose Oggie wants to buy a house that costs ₱1,000,000. You give a down payment of
₱200,000, and then he loaned the remaining ₱800,000 from a bank. The agreement with the bank is
that he will pay for the mortgage on a monthly basis for 10 years and that the bank will charge a 3%
interest rate, compounded monthly, on er loan. Determine the amount of his monthly payment.

SOLUTIONS AND ANSWERS

The following information were given in the problem: P = ₱800,000, t = 10 years, and r = 3%.
Since you will be paying on a monthly basis, we also have n = 12. The other given information
(that is, the cost of the house and the amount of your down payment) are not necessary for
solving the problem. We can use the general formula that was stated previously. So if we
substitute the given values, we have:
𝑟
𝑃(𝑛)
PM = 𝑟 −𝑛𝑡
1−( 1+ )
𝑛
0.03
800,000 ( 12 )
PM = 0.03
1−( 1+ 12 )−12(10)

… continued in the next page

Page 2 of 6
 Business Mathematics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – BUS MATH Subject Teacher: JOAN A. MALA

SOLUTIONS AND ANSWERS

… continued from the previous page

800,000 ( 0.0025 )
PM =
1−( 1+ 0.0025 )−120
2,000
PM =
1−( 1.0025 )−120
2,000
PM =
1−0.7410956173
2,000
PM =
0.2589043827
PM = ₱7,724.859576 ~ ₱7,724.86

Therefore, Oggy needs to pay a monthly amortization of ₱7,724.86 every month for 10 years
to fully pay the mortgage.

Now let us analyze the situation in example 1 further. In 10 years, you will have a total of 120
monthly payments; that is, nt = (12)(10). We have determined that the amount of each periodic or
monthly payment is ₱7,724.86. so the total amount (which we denote as A) that you need to pay the
bank is the product of the total number of monthly payments (nt) and the periodic payment (P M). In
symbols,
A = n x t x PM

So the total amount that you will pay the bank is:
A = (12)(10)(7,724.859576)
A = ₱926,983.1491 ~ ₱926,983.15

To get the total interest I that the bank charges on your mortgage, simply subtract the amount
of the principal amount P from the total payment A. In symbols,
I=A–P

Hence, the total interest that you need to pay the bank is
I = 926,983.1491 – 800,000
I = ₱126,983.1491 ~ ₱126,983.15

Notice that as you use the numbers or result from previous solution, I am using the complete
answer. That is to give the exact final answer and not an approximation or estimation.

Remember also that when the compounding changes, the value of n also changes.

EXAMPLE 2. Problem Solving Involving Interest Applied on a Mortgage

Mr. Bean wants to purchase a car that costs ₱1,300,000. He will give a down payment of
₱300,000, and then he will loan the balance from THIS Bank that charges a 7.5% interest rate,
compounded monthly. He also agreed to pay the bank monthly for 5 years.

a. How much is his monthly amortization?

b. How much is the total interest on his loan?

Page 3 of 6
 Business Mathematics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – BUS MATH Subject Teacher: JOAN A. MALA

SOLUTIONS AND ANSWERS

Since the cost of the car is ₱1,300,000 and Mr. Bean will give a down payment of ₱300,000,
the principal amount P that he will borrow from the bank is:

P = 1,300,000 – 300,000
P = ₱1,000,000

The following additional information were given in the problem: t = 5 years and r = 7.5%. Since
he will be paying on a monthly basis, we also have n = 12.

a. We can use the general formula for solving the monthly payment PM, as shown below:
𝑟
𝑃(
)
𝑛
PM = 𝑟
1−( 1+ 𝑛 )−𝑛𝑡
0.075
1,000,000 ( 12 )
PM = 0.075 −12(5)
1−( 1+ )
12
1,000,000 ( 0.00625 )
PM =
1−( 1+ 0.00625 )−60
6,250
PM =
1−( 1.00625 )−60
6,250
PM =
1−0.6880918239
6,250
PM =
0.3119081761
PM = ₱20,037.9486 ~ ₱20,037.95

Therefore, Mr. Bean needs to pay THIS Bank a monthly amortization of ₱20,037.95 for 5
years.

b. To determine the total interest on his loan, we need to solve first for the total amount A of
his payments; that is,
A = ntPM
A = (12)(5)(20,037.9486)
A = ₱1,202,276. 916 ~ ₱1,202,276.92

Then we solve for the total interest I as follows:

I=A–P
I = 1,202,276.916 – 1,000,000
I = ₱202,276.916 ~ ₱202,276.92

Thus, the total interest on his loan is ₱202,276.92.

Again, notice how the problem was solved following step by step process.

In solving problems that requires long list of solutions, following steps carefully is important.
Skipping or missing at least one of the steps may result into wrong answers.

EXAMPLE 3. Problem Solving Involving Interest Applied on a Mortgage.

Suppose Bha Hai is planning to apply for a housing loan. The lender offers different interest
rates that reflect the differences in terms of the risks of shorter-term and longer-term loans. The
following are the options that were given to you:
Page 4 of 6
 Business Mathematics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – BUS MATH Subject Teacher: JOAN A. MALA

 OPTION A: the mortgage will be paid on a monthly basis for 15 years at an interest rate of
6.25%, compounded monthly.
 OPTION B: the mortgage will be paid on a monthly basis for 30 years at an interest rate of
6.75%, compounded monthly.

1. If Bha Hai plan to borrow ₱2,400,000, how much will be your monthly amortization in each
option?
2. Explain the advantages and disadvantages of each option.

SOLUTIONS AND ANSWERS

1. In both options, the principal amount P is ₱2,400,000 and the payment will be on a
monthly basis, which means that n = 12.
For option A, the following information were given: t = 15 years and r = 6.25%. so we have:
𝑟
𝑃()
𝑛
PM = 𝑟 −𝑛𝑡
1−( 1+ 𝑛 )
0.0625
2,400,00 ( 12 )
PM = 0.0625
1−( 1+ 12 )−12(15)
2,400,00 ( 0.0052 )
PM =
1−( 1+ 0.0052 )−180
12,480
PM =
1−( 1.0052 )−180
12,480
PM =
1−0.3931457763
12,480
PM =
0.6068542237
PM = ₱20,565.07068 ~ ₱20,565.07
Thus, in Option A, the monthly amortization is approximately ₱20,565.07 for 15 years.

For option B, the following information were given: t = 30 years and r = 6.75%. so we have:
𝑟
𝑃(𝑛)
PM = 𝑟
1−( 1+ 𝑛 )−𝑛𝑡
0.0675
2,400,00 (
12
)
PM = 0.0675
1−( 1+ 12 )−12(30)
2,400,00 ( 0.005625 )
PM =
1−( 1+ 0.005625 )−360
13,500
PM =
1−( 1.005625 )−360
13,500
PM =
1−0.1327449109

… continue to next page

Page 5 of 6
 Business Mathematics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – BUS MATH Subject Teacher: JOAN A. MALA

SOLUTIONS AND ANSWERS

… continued from the previous page

13,500
PM =
0.8672550891
PM = ₱15,566.35432 ~ ₱15,566.35
Thus, in Option B, the monthly amortization is approximately ₱15,566.35 for 30 years.

2. If we will compare the results in item (1), we can say that you will pay a lower monthly
amortization in option B (which is a longer-term loan) than in option A (which is a shorter-
term loan). However, we also need to compare the total interest that you need to pay
the bank.

For Option A, the total payment and the interest can be computed as follows:
A = ntPM
A = (12)(15)(20,565.07068)
A = ₱3,701,712.722 ~ ₱3,701,712.72

I=A–P
A = 3,701,712.722 – 2,400,000
A = ₱1,301,712.722 ~ ₱1,301,712.72

Therefore, the total interest in option A is ₱1,301,712.72.

For option B, the total payment and the interest can be computed as follows:
A = ntPM
A = (12)(30)(15,566.35432)
A = ₱5,603,887.555 ~ ₱5,603,887.56

I=A–P
A = 5,603,887.555 – 2,400,000
A = ₱3,203,887.555 ~ ₱3,203,887.56

Therefore, the total interest in option A is ₱3,203,887.56.

Notice that although option B has a lower monthly amortization, the total interest that you
need to pay is much higher than that in option A. Generally, shorter-term loans (like option
A) is better than longer-term loans (like option B) if you want to pay a lower total interest.
But the downside for shorter-term loans is that the monthly amortization is usually higher. In
the end, the payment terms that will be more advantageous to you will depend on your
capacity to pay.

References:
 BAL 650.0151 Si79 2016 Sirug, Winston S. (2016), Business mathematics for senior high school -
ABM specialized subject: a comprehensive approach, Mindshaper Co., Inc., Intramuros,
Manila
 Jerico, B. B., & Jeffrey, S. M. (2017). Business Mathematics for Senior High School. Quezon City:
C & E Publishing.

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