Page 92 - CalcBus_Flipbook

10-14 Credit CH 10]

money working for the owner and the cost of money in a market that reacts to supply and
demand.
Some will look at this total interest payment of $373,023.14 and say “I’m not paying that!”
“Why the purchase of the property is only $400,000 and now I am paying almost twice to its
original purchase price!” This argument is valid. So what are there alternatives? The
alternatives include: (1) Don’t purchase and continue to pay rent even though the regular
payment fits in your budget. Renters have no ownership, they do not build equity (savings and
investments) for themselves as they pay the mortgage of their landlord or building owner who
was willing to take on the risk and payments with his partner, his bank. (2) Purchase the
property outright with $400,000 and add to that number the closing costs to the purchase or
make arrangements on those costs. To discover what those ‘arrangements’ could be take a
Finance class, a Real Estate Finance class or a Personal Finance class. Now the question is,
does the buyer who brings home $7,404.45 net income have in his savings and investments
account the $400,000 to make a clean purchase? How long will he have to set aside his tithe
for savings and investments to have $400,000? (3) Then there is the third alternative to look
for a less expensive property, maybe 65 miles outside of Los Angeles and commute to work.
These are valid considerations even after the arithmetic has been completed and analysis
made. Note that purchasing your own home and the investment it takes is valid for a savings
and investment plan that increases wealth.

Preparing a Loan Payment Schedule. A loan payment schedule is prepared from
knowing the monthly payment, interest rate per payment, and the total number of payments to
be made; and shows the loan terms. The schedule will show the amount of interest paid and
cumulative total interest paid, along with the reduction in principal owed and the amount of
principal paid for each payment. A computer can be programmed to compute and print the
loan payment schedule in a matter of seconds rather than the hours an individual working
with a calculator, pencil and paper may need. Figure 10.3 illustrates the first year (payments
#1 - #12) of payments, the middle payments in year 16 (payments #193 - #195) when more of
the monthly payment begins to go towards the loan balance and less to the interest due, and
the final 30 year payments (#356 - #360) where all the principal loan and interest due is paid
in full.
The particulars of the loan in Figure 10.3 are that the loan amount is for $400,000, the
annual interest rate is 5%, the life of the loan is 30 years and the borrower will make 12
monthly payments and those payments will be an equal $2,147.29 each until the last
payment (payment 360) which is 2,138.38. Note that a 30 year loan paid monthly (12 months
per year) will have a total of (30 x 12 =) 360 payments for the life of the loan.

Example: Summarizing the information from above:

Solution: Loan amount $400,000.00
Interest rate per year 5%
Life of Loan in years 30
Payments per year 12
Total number of payments (30 x 12 =) 360

The Loan Payment Schedule is a valuable tool for the borrower when paying on real estate
because currently the interest paid each year will reduce the overall Federal and State tax
liability. If, for example, our borrower has a net take home pay of $7,404.45 each month then
he probably begins his tax liability with an annual income of $96,600. The first years interest
on his $400,000 property would be $19,865.98, and this interest payment adjusts his taxable
income down to $76,734.02. Yes, the interest payment to purchase a home has that direct
effect on taxable income by reducing it. To find out more about how this works take a tax
class, or accounting classes in your school, and, of course, start doing your own taxes and
read the forms and booklets you have paid for. These are written by the IRS and explain how to
fill in the tax forms. Note, that these IRS books are written on an 8th grade reading level!

Arithmetic for the Monthly Payment equation. When purchasing real estate, selling
real estate, or lending on real estate, it is important to know how to calculate the payment on
any loan. Using either the A or B equation below, this becomes a simple process and can be

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