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Amortized

Loans

Add-on Loans
 Amortized Loans
Is the case when the loan is to be repaid in equal periodic
amounts (weekly, monthly, quarterly or annually)
example for that automobile loans, appliances loans and
home mortgage loans

The periodic loan payment consist of two parts
Principal payment PPn and Interest payment In
A = PPn + In
1

Three common methods could be used

for calculating the interest and principal
payments for an amortized loan
1. Method 1(Tabular method)
2. Method 2 (Remaining Balance Method)
3. Method 3 (Computing Equivalent Worth
at nth Payment)
 Only method one will be used
2

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B0 is the starting balance

I1 = B0*i =P *i
PP1 = A - P *i
B1 = B0 - (A-P *i) =P-PP1
At the end of second period
I2 = B1 i = (P-PP1)i
Pp2 = A (P-PP1)i = (A-Pi) + PP1 i = PP1 (1+i)
B2 = B1 PP2 = P-(PP1+PP2)
Bn = P- (PP1+PP2+..+PPN)
= P- (PP1+PP1 (1+i)+..+PP1 (1+i)n-1
= P- PP1(F/A, i, n)
= P- (A-P*i) (F/A, i, n)
In = (Bn-1)i
PPn = A-In

Suppose you secure a home improvement loan in the

amount of $5000 from a local bank. The loan officer
computes your monthly payment as follows
Contract amount = 5000
Contract period = 24 month
Annual percentage rate = 12%
Monthly installments = 235.37
Find the remaining balance, interest payment, and
principal payment at the end of each period

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In = (Bn -1) i
I1 = 5000 (12%/12) = 50.0
PP1 = A In
= 235.37 50
PP1 = 185.37
B1 = 5000 185.37 = 4814.63
I2 =4814.63 *0.1 = 48.15
PP2 = 235.37-48.15
PP2 = 187.22
B2 = 4814.63 187.22= 4627.41
5

In this type of loan , the total interest to be paid is precalculated and added to the principal
Then the new amount (principal plus the pre-calculated
interest) paid in equal installments
Total add on interest = P(i) (N)
Principal plus add on interest =P+P(i)(N)=P(1+iN)
Monthly installments =P(1+iN)/(12*N)
The add on interest is simple interest

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Suppose that you borrow $5000 with add-on rate of

12% for 2 years. You will make a 24 equal monthly
payment.

Determine the amount of the monthly installment

Compute the nominal and effective annual interest
rate on the loan
Add- on rate = 12% year
P = 5000
N= 2
A =?
7

iPN = 0.12 *5000*2 = 1200

A = (5000 + 1200) /24 = 258.33
ia =?
258.33 = 5000(A/P, i, 24)
(A/P, i, 24) = 0.0517
(A/P, i, 24)
i
0.0514
1.75%
0.0517
?
0,0529
2.00%
i = 1.8% per month
8

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A mortgage is generally a long-term amortized loan used

primarily to the purpose of purchasing a piece of property such as
home
Types of Mortgages
National Housing Act (NHA) mortgage
Conventional mortgage
High- Ratio mortgage
Collateral Mortgage
National Housing Act (NHA) mortgage granted under the
provisions of the national housing act of 1954.

Conventional mortgage: very common type of financing the loan

amount generally doesnt exceed 75% of the appraised value or
the purchase price of the property , whichever is lower.

High- Ratio mortgage: it is a conventional mortgage that exceed

the 75% up to 95% of the purchased price or the appraised value,
whichever is lower.

Collateral Mortgage: It is a mortgage that provides backup

protection of a loan is filed against a property

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Amortization: amortization refers to the number of years it would

take to repay a mortgage loan in full for a given interest rate and
payment schedule usually (25 years)
Terms of the mortgage: is the number of months or years which the
mortgage the legal document- covers
Interest rate
By law, mortgages must contain a statement shown among other
things, the rate of interest calculated annually or semi annually
Open or closed mortgage : an open mortgage one can pay off the
mortgage in full at any time before the term is over without any
penalty or extra charges ,while the closed mortgage does not allow
the borrower to repay the loan more quickly than agreed. Penalty
charge is applied , when borrower wants to pay off the mortgage
before term is over.
Payment schedule: it could be monthly ,weekly, bi-weekly, semimonthly, quarterly, semi-annually or annually.
Prepayment privileges: option of 10% of the original principal every
calendar year or increase the regular payment by up to 100% once
per year.
Portability: borrower can sell one home and buy another during the
term of the mortgage. The mortgage can be transferred from one
property to the other without penalty.

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Home price = 125,000

Down payment 25,000
Conventional mortgage = 100,000
3 years term 8% per annum
Amortization period of 25 years
Closed mortgage with payment privileges:
1- once each year extra payment of 10% of the original borrowed amount
and it cannot
be carried forward to the following years
2- once each calendar year can increase the amount of regular installment
of principal
and interest, can not exceed 100% of the installment payment.

What is the amount of the regular payment

Weekly, semi monthly, monthly ?

Determine the balance after three years

In year 2 the payment increased by 50%, in year three 100% increases

What is the balance of the mortgage at the time of renewal?

P= 100,000, r = 8%, M=2

amortization = 25 years,
term= 3 years

P
2 3

0
A =?