5. The mathematics of mortgage loans - Part 1

The Mathematics of Mortgage Loans

In general, a mortgage loan is repaid monthly over the term of the loan using the process of amortization, in which each payment contains two components: the interest that is owed on the debt outstanding and the portion of the principal that is being repaid.

An amortization table or schedule details the monthly payments, the portions that will be used to pay the accrued interest and the repayment of the principal, and the debt remaining after each payment is made over the life of the loan.

Example Amortization Schedule for a 10-Year

Conventional Mortgage Loan

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Month	Beginning Amount	Monthly Payment	Monthly Interest	Repayment of Principal	Ending Balance
(Col. #1)	(Col. #2)	(Col. #3)	(Col. #4)	(Col. #5)	(Col. #6)
1
2
3
. . .
120

Start with the theory behind the mathematics of amortization.

1. In completing an amortization schedule for a conventional mortgage, it is important to recognize the following:

	The monthly payments are in amount.
	The monthly payment is calculated by multiplying the mortgages interest rate by the loans outstanding balance.
	The amount used to repay the loans principal is calculated as the difference between the monthly payment amount and the monthly interest amount. It is over the life of the loan.
	The ending balance for a particular month is calculated by subtracting the months payment from the months beginning balance.

2. Therefore, as the loan is repaid, the amount of interest owed , and the amount of principal repaid by each payment .

3. The term refers to the dollar value of a home in excess of the amount owed on it. For example, a home that is worth, or has a market value of, $200,000 currently has a $165,000 mortgage loan against it. The houses owner currently has of equity in his or her home. Further, when the market value of the home is greater than the loan on it, the homeowners equity is , but in market conditions in which the homeowner owes more on the home than the house is worth, then the homeowner will have equity. This is also referred to as being in the value of the home.

4. As the loan is repaid, the homeowners equity . The second source of homeowners equity is

the depreciation in the market value of the home.

the appreciation in the market value of the home.