Page 90 - CalcBus_Flipbook

10-12 Credit CH 10]

CALCULATING LONG-TERM DEBT, MORTGAGES
Calculating Principal & Interest on a Mortgage
Mortgages are used when purchasing real estate and the life of the loan is from 15
years to 30, 40 or even 50 years, though rarely 50 years. If you are a first time home buyer,
a mortgage of 30 years is quite common. The purchase agreement is rather straight forward
in that the buyer decides to make a down payment depending on the type of loan being
used, from 0.00% to 5%, to 10%, or 15%, or 25% and more. These down payments are
subject to the cash the buyer has on hand in their savings account or the savings and
investments account. There are closing costs associated with the purchase, real estate
agency fees, etcetera that for this discussion will simply muddy the discussion. It is
recommended for all of the details of a real estate transaction that you take a class on
Personal Finance where the mud on these small issues is clarified.
Caveat: Latin, The size of a mortgage loan along with the loan life and interest rate is agreed on with
meaning the lender. Of course, the size of the loan is dependent on (1) the agreed property selling
WARNING; price, (2) the amount of down payment, and the interest, and (3) MOST IMPORTANTLY of all,
beware!
these numbers must be balanced to your budget, which is your ability to pay the regular
payment amounts. Caveat: you will want to have your payments not exceed 30% of your
net income or 25% of your gross income as this allows some assurance of the ability to
make the loan payment. Exceeding these values and the borrower jeopardizes their ability
to make the regularly scheduled payment when a water heater breaks, or a roof needs to be
replaced or some other catastrophe occurs, which is never anticipated. Typically the first
time real estate purchaser looks to their bank, where they have their bank accounts, or find
a mortgage company to finance the purchase. Though, for the first time buyers, do not
overlook the bank of mom and dad as they are the LARGEST NUMBER of lenders in the nation.
Remember the elements to any loan are the same elements discussed with the simple
interest calculations: Principal, interest rate and time.
Purchasing a producing business is a bit more complex because here you will be
dealing with inventories, employees, balance sheets, income statements, in addition to the
insurance policies already in place, contracts in place with vendors and customers, and
sometimes looking to the seller finance part of the purchase as a lender. Commercial
lenders prefer business owners to invest around 40% or more to lessen their risk when
taking on the transaction. Other than these elements the actual mortgage calculation is
really the same as the equation above.

Mortgage Types: Fixed and Variable Rate
For home mortgages fixed and variable interest rate mortgages are the most common
forms of loans used by property buyers today. More creative financing tools do exist and
these would be discussed in a Business and Real Estate Finance course and/or a Personal
Finance course.
The difference between a fixed and variable interest rate loan is relatively
straightforward. In a fixed-rate mortgage, the interest rate assigned to you through the
lender at the commencement of borrowing remains the same throughout the life of the loan;
thus the name fixed-rate. With the variable interest rate loan the initial interest rate
assigned will change at periodic intervals throughout the duration of the loan. The lender
will disclose all of the information related to the interest rate before a loan contract is
signed, including a schedule of adjustments on the interest in a variable rate mortgage.
Which loan type is best depends on the budget and ability to make regular payments.
With a fixed rate loan, use the 30%-25% rule from above. For a variable rate loan, the
interest rate is significantly lower than a fixed rate for a short period of time, then as the
lender raises the rate that payment may exceed the 30%-25% rule and will definitely exceed
the level payment of the fixed rate loan.

Calculating Principal and Interest
Once the loan logistics are determined, including the life of the loan, the amount
borrowed and interest rate, the lender will disclose what the monthly payment will be,
which will be a payment to cover principal and interest. They will also inform the buyer of
property taxes they will collect in a trustee account to make certain that the property taxes

Copyrighted Material