How to Calculate Mortgage Amortization

What are the characteristics of a loan that uses amortization?

Initial balance, fixed payments, and interest rate.

What happens during each adjustment period of an ARM?

Interest rate and remaining periods are adjusted.

What is the unit of measure for the interest rate?

It must be in the same unit as the duration, such as months or years.

What is the unit of measure for the duration of the loan?

It must be in the same unit as the interest rate, such as months or years.

What is amortization?

Process of paying back a loan over time with regular payments.

What is the 10/1 ARM?

An ARM with a fixed interest rate for the first ten years and adjusts yearly thereafter.

Where can amortization be found?

In loans with an initial balance, fixed payments, and interest rate.

What are the two most common lengths of mortgages?

15-year and 30-year.

What is an index in relation to ARMs?

A benchmark that reflects changing economic conditions and is used to determine the interest rate of an ARM.

What is the cap on interest rate changes in an ARM?

A limit on how much the interest rate can change during an adjustment period.

What is a cap on interest rate changes?

A limit on how much the interest rate can increase or decrease during any rate adjustment period.

What is a car note?

A loan taken out to finance the purchase of a car.

What is a hybrid-ARM?

A loan that combines features of both fixed-rate and adjustable-rate mortgages.

What is a mortgage loan?

A loan used to finance the purchase of real estate.

What is a fixed-rate loan?

A loan with a constant interest rate throughout the term.

What is a fixed-rate loan?

A loan with a stable interest rate throughout its term.

What is an adjustable-rate mortgage (ARM)?

A loan with an interest rate that can change during the loan term.

What is an adjustable-rate mortgage (ARM)?

A mortgage with an interest rate that can change over time.

What is the amortization of an ARM?

Calculated like a fixed-rate loan until first adjustment.

What are two common examples of loans that use amortization?

Car loans and mortgage loans.

How are installment payments in amortization structured?

Combination of principle and interest.

What is the loan balance like in revolving credit?

Ever-changing based on credit usage and debt repayment.

What is the difference between a fixed-rate loan and an ARM?

Fixed-rate loan has a constant interest rate, while ARM's rate can change.

What additional variables are required to calculate the amortization of an adjustable-interest loan?

Frequency of rate adjustment and any cap on interest rate changes.

What is the advantage of an ARM?

Lower starting interest rates and potentially lower payments if market interest rates fall.

What is the composition of early payments in amortization?

More interest than principle.

What is the composition of later payments in amortization?

More principle than interest.

Does the loan balance decrease linearly in amortization?

No, it decreases exponentially.

Is amortization used in revolving credit applications?

No, it is not used in revolving credit.

Are payment amounts fixed in revolving credit?

No, payment amounts are not fixed.

What are the three pieces of information required to calculate the amortization of a fixed-term loan?

Principle, interest rate, and duration.

What is amortization?

Repayment of a loan in regular installments over time.

What are some examples of loans that do not use amortization?

Revolving credit applications like credit cards.

How does the outstanding balance of a loan decrease in amortization?

Slowly at the start and faster later on.

What is the advantage of a fixed-rate loan?

Stability in installment payments throughout the loan term.

What is the mortgage amortization formula?

The amortization payment formula for calculating amortization, such as a mortgage loan, is: A = (i * P * (1 + i) ^ n) / ((1 + i) ^ n - 1)

What is the purchase price of a real estate property?

The amount paid to acquire the property.

What is the principle (P) in the amortization formula?

The amount to be borrowed.

What is the interest rate (i) in the formula?

The annual interest rate, which is converted to a monthly rate.

What is the frequency of rate adjustment?

The frequency at which the interest rate can be adjusted, such as yearly or quarterly.

What is the difference between 15-year and 30-year mortgages?

The length of time to repay the loan.

What does 'A' represent in the loan amortization formula?

The monthly loan installment payment.

What is the duration (n) in the amortization formula?

The number of installment payments made.

What is the duration of the loan?

The number of periods for which the loan will be paid.

What is the loan duration (n) in the formula?

The number of years the loan will be repaid over.

What is the first adjustment period in an ARM?

The period when the interest rate is updated for the first time.

What does 'i' represent in the loan amortization formula?

The periodic interest rate.

What does 'P' represent in the loan amortization formula?

The principal loan amount.

What is re-amortization?

The process of adjusting the loan's amortization schedule due to changes in the interest rate.

What is amortization in the context of real estate?

The process of paying back a mortgage loan over time.

What is the interest rate (i) in the amortization formula?

The rate at which interest is charged on the loan.

What is the loan interest rate?

The rate at which interest is charged on the loan.

What is the principle of the loan?

The total amount borrowed and repaid over time.

What is the principle (P) in the formula?

The total amount borrowed or the loan amount.

What does 'n' represent in the loan amortization formula?

The total number of payment periods.

What is the unit of measure for interest rate and duration?

They must be in the same unit, such as months or years.

Calculating Amortization: Fixed-Term Loan

Three pieces of information are required, all of which will be part of the loan agreement to calculate the amortization of a fixed-term loan. Principle (P), or the amount to be borrowed Interest rate (i), and whether it's stated in terms of annual rate (versus monthly) The duration (n) of the loan, or number of installment payments made After gathering these inputs, the amortization (A), or monthly payment amount, can be calculated using the following formula: A = (i * P * (1 + i) ^ n) / ((1 + i) ^ n - 1)

Why is amortization used in real estate transactions?

To allow buyers to pay for the property over time.

What is the purpose of the formula for calculating monthly payments?

To determine the fixed monthly payment amount for a loan.

What is the purpose of car note amortization?

To determine the monthly payments for a car loan.

What is the purpose of amortization?

To determine the monthly payments for a loan.

What is the purpose of updating the calculation in an ARM after every adjustment period?

To ensure accurate monthly payment calculations throughout the loan term.

What is the purpose of adjusting n in an ARM?

To reflect the remaining periods in the loan after an adjustment.

What is the purpose of adjusting i in an ARM?

To update the interest rate to the new rate after an adjustment.

What is the disadvantage of an ARM?

Uncertainty in monthly payments due to fluctuating interest rates.