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Module 8 Business Mathematics

The document discusses various concepts related to mortgages and loan amortization, including defining terms like collateral, down payment, and amortization. It provides examples of calculating down payment amounts, monthly mortgage payments using formulas, and constructing amortization tables showing how interest and principal payments are applied over the life of a loan. The examples walk through calculating interest rates, monthly payments, interest payments, principal payments, and outstanding balances.

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Maam April
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41 views

Module 8 Business Mathematics

The document discusses various concepts related to mortgages and loan amortization, including defining terms like collateral, down payment, and amortization. It provides examples of calculating down payment amounts, monthly mortgage payments using formulas, and constructing amortization tables showing how interest and principal payments are applied over the life of a loan. The examples walk through calculating interest rates, monthly payments, interest payments, principal payments, and outstanding balances.

Uploaded by

Maam April
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MODULE 8:

Interest on
Mortgage and
Amortization
MORTGAGE LOAN
• a type of loan in which you use your
property or asset as collateral for a
loan from a financial institution.
MORTGAGE LOAN
• For most installment purchases, a
down payment is generally required.
• It is usually a certain percent of the
purchase price.
MORTGAGE

• a type of secured loan that makes


use of real property such as a house
or lot as collateral.
COLLATERAL
• an asset presented by a borrower
that is pledged to be given to the
lender in case the borrower
defaulted the loan or failed to pay
back the loan.
DOWN PAYMENT

• is part of the cash price


paid at the time of
purchase.
Example 1
Mr. Matiks wishes to purchase a secondhand car worth
Ᵽ312,500.00 and the seller requires a 20% down
payment.

To compute for down payment:


Down payment = Purchase price x Down payment %

= Ᵽ312,500.00 x 20 %
Down payment = Ᵽ62,500.00
Example 1
Mr. Matiks wishes to purchase a secondhand car worth
Ᵽ312,500.00 and the seller requires a 20% down
payment.

Mortgage loan = Purchase price – Down payment


= Ᵽ312,500.00 - Ᵽ62,500.00
Mortgage loan = Ᵽ250,000.00
FORMULAS
Periodic Interest Rate
𝑟
𝑖=
𝑚

where, 𝑖 = monthly interest rate


𝑟 = nominal interest rate compounded
𝑚 = times per year on the loan
FORMULAS
Monthly Mortgage Payment
where,

M = total monthly mortgage payment


(𝑃)(𝐢) (1+𝐢)𝑛 P = the principal loan amount
M = i = monthly interest rate
(1+𝐢)𝑛 −1 n = number of payments over loan’s
lifetime
Example 2
Rachel takes out a ₱1,500,000.00 loan at a fixed interest
rate at 5 % to buy a house. The loan is to be repaid in a
time of 30 years. Calculate Rachel’s monthly mortgage
payment.
Given:
P ₱1,500,000.00
i r/m = 0.05/12
n mt = 12(30)
M
Example 2
𝑃 𝑖 1+𝑖 𝑛
M =
(1+𝑖)𝑛 −1
(1,500,000)(0.05/12) (1+0.05/12)360
M=
(1+0.05/12)360 −1

(6,250) (4.467744314)
M=
(3.467744314)

(27,923.40196)
M=
(3.467744314)

M = 8, 052.32
AMORTIZATION
• is the process of paying a loan
and its interest through a series
of regular equal payments. A loan
paid using this scheme is
described as an amortized loan.
INTEREST PAYMENT

• In a loan amortization
arrangement, the interest due
on the outstanding balance is
first deducted from the
payment .
PRINCIPAL REPAYMENT

• The remaining amount, which is


the payment less the interest
payable on the outstanding
balance, is used to retire the
loan principal.
Formulas
Time (periods
after the Payment, Interest Payment, Principal Outstanding
loan) 𝑲𝒕 𝑰𝒕 Repayment, 𝑷𝒕 Balance, 𝑶𝑩𝒕
0 - - - L = 𝑂𝐵0
1 𝑲𝟏 𝑰𝟏 = 𝑂𝐵0 𝑥 𝑖 𝑷𝟏 = 𝐾1 − 𝐼1 𝑂𝐵1 = 𝑂𝐵0 − 𝑃1
2 𝑲𝟐 𝑰𝟐 = 𝑂𝐵1 𝑥 𝑖 𝑷𝟐 = 𝐾2 − 𝐼2 𝑂𝐵2 = 𝑂𝐵1 − 𝑃2
⁝ ⁝ ⁝ ⁝ ⁝
n–1 𝑲𝒏−𝟏 𝑰𝒏−𝟏 = 𝑂𝐵𝑛−2 𝑥 𝑖 𝑷𝒏−𝟏 𝑂𝐵𝑛−1
= 𝐾𝑛−1 − 𝐼𝑛−1 = 𝑂𝐵𝑛−2 − 𝑃𝑛−1
n 𝑲𝒏 𝑰𝒏 = 𝑂𝐵𝑛−1 𝑥 𝑖 𝑷𝒏 = 𝐾𝑛 − 𝐼𝑛 𝑂𝐵𝑛 = 𝑂𝐵𝑛−1 − 𝑃𝑛
=0
Example 3
On June 1, 2015, Gervin secured a loan of ₱1,000,000.00
to be paid in 10 equal installments. The interest on the
loan is 8% compounded semi-annually, and payments
are due every six months, with the first payment due six
months after the loan was secured.
1. Determine the amount Gervin must pay at the end of
each period.
2. Construct the table illustrating the amortization of the
loan
Example 3
Periodic Interest Rate
Given:
8% compounded semi-annually
Formula:
𝑟
𝑖=
𝑚
Substitute:
0.08
𝑖=
2
i = 𝟎. 𝟎𝟒
Example 3
Monthly Payment
Given:
i = 0.04
n = 10
Formula:
(𝑃)(i) (1+i)𝑛
M =
(1+i)𝑛 −1

Substitute:
(1,000,000)(0.04) (1+0.04)10
M =
(1+0.04)10 −1
M = ₱123,290.94
Example 3
Interest Payment
Given: Formula:
𝑂𝐵0 = 1,000,000 𝐼1 =𝑂𝐵0 𝑥 𝑖
i = 0.04
Substitute:
𝐼1 = 1,000,000 𝑥 0.04
𝑰𝟏 = ₱40,000
Example 3
Principal Payment
Given: Formula:
𝐼1 = 123,290.94 𝑃1 = 𝐾1 − 𝐼1
𝐾1 = 40,000

Substitute:
𝑃1 = 123,290.94 − 40,000
𝑷𝟏 = ₱83,290.94
Example 3
Outstanding Balance
Given: Formula:
𝑂𝐵0 = 1,000,000 𝑂𝐵1 = 𝑂𝐵0 − 𝑃1
𝑃1 = 83,290.94

Substitute:
𝑂𝐵1 = 1,000,000 − 83,290.94
𝑶𝑩𝟏 = ₱916,709.06
Example 2
Period Payment (₱) Interest Payment Principal Outstanding
(₱) Repayment (₱) Balance (₱)
0 - - - 1,000,000.00
1 123,290.94 40,000.00 83,290.94 916,709.06
2 123,290.94
3 123,290.94
4 123,290.94
5 123,290.94
6 123,290.94
7 123,290.94
8 123,290.94
9 123,290.94
10 123,290.94
Example 2
Period Payment (₱) Interest Payment Principal Outstanding
(₱) Repayment (₱) Balance (₱)
0 - - - 1,000,000.00
1 123,290.94 40,000.00 83,290.94 916,709.06
2 123,290.94 36,668.36 86,622.58 830,086.48
3 123,290.94 33,203.46 90,087.48 739,999.00
4 123,290.94 29,599.96 93,690.98 646,308.02
5 123,290.94 25,852.32 97,438.62 548,869.40
6 123,290.94 21,954.78 101,336.16 447,533.24
7 123,290.94 17,901.33 105,389.61 342,143.63
8 123,290.94 13,685.75 109,605.19 232,538.44
9 123,290.94 9,301.54 113,989.40 118,549.04
10 123,290.94 4,741.96 118,548.98 0.06
Activity 8.1 Interest on Mortgage and Amortization
Directions: Analyze the given carefully and solve for the unknown
term.
A loan amounting to ₱150,000.00 is secured dated January 1,
2022. The loan will be paid by means of 12 equal payments to
be made at the end of each month, with the first payment due
on January 31, 2022. The interest rate is 12% compounded
monthly.
a. Determine the required monthly payments to retire the
debt.
b. Construct the table showing the amortization of the loan.
THANK YOU!
Do you have any question for me?

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