[0:00]Do you have a plan to purchase a house and lot? But you don't have enough money to pay it in full immediately. There's nothing to worry about because there is such a process called mortgage. So if you want to learn more about mortgage, continue watching this video.
[0:33]Hello, everyone. Welcome back to my YouTube channel. In this video, we will learn again another lesson in Business Mathematics and the topic is all about mortgage and amortization. What are the learning objectives? At the end of this lesson, you should be able to define interest as applied on mortgage and amortization and illustrate how interest is computed specifically as applied to mortgage and amortization. So first, let us define mortgage. When we say mortgage, it is a process that will let you not to pay for the whole cost of the property purchased immediately. It is a type of loan that is secured with real estate or personal property. This process is commonly used when purchasing real estate like houses or buildings. So if you don't have enough money to pay it in full, you may put it in mortgage loan. To further illustrate this, let us have a real life scenario. Suppose you have saved Php 400,000 and you are planning to buy a house that costs Php 2,500,000. Since your savings is not enough to fully pay for the house in cash, you applied for a mortgage from a bank. You used your savings as a down payment, and then you will pay the remaining balance to the bank using the house as collateral. If we're going to look at this real life scenario, there are two important concepts mentioned. These are the mortgage and down payment. The remaining balance mentioned, which is the amount loan from the bank, is called a mortgage loan. It is a term used when you make your property as collateral for a loan from a financial institution. When we say collateral, the property that is held as security on a mortgage. It's like you are depositing your property to that financial institution. And to solve for the mortgage loan, we just have to get the difference between the cost of the house and the down payment. So what is the meaning of a down payment? When we say down payment, it refers to a certain percent of the purchase price of the property. It is generally called the buyer's equity. It is the first payment that one makes when one buys something with an agreement to pay the rest later. And to find the down payment, we just need to multiply the purchase price with the down payment percent value. Or, to find down payment, we could also use purchase or selling price minus the mortgage loan. Let us have an example. Assume that you wish to purchase a house and lot worth Php 2,205,600 and the seller requires a 20% down payment. How much is the down payment? How much is the mortgage loan? To solve for the value of the down payment, we need to follow the formula.
[3:48]Down payment is equal to the purchase price times the down payment percentage. So based in our given, the purchase price is 2,205,600. Multiply by the percent of the down payment, which is 20% in decimal, it is 0.20. Multiplying these two, the result is Php 441,120. So this means that the 20% down payment of the house and lot is Php 441,120. And to solve for the mortgage loan, we need to follow the formula.
[4:36]Mortgage loan is equal to the purchase price minus the down payment. So we have 2,205,600 minus the down payment, which is 441,120. Subtracting these two, the result is 1,764,480. This means that the mortgage loan or the balance left after deducting the down payment is 1,764,480. In our given example, 20% of the house and lot is the down payment. 80% of it is under the mortgage loan. This means that you will be paying it on an installment basis, which refers to the term Amortization. What do we mean by this? Amortization refers to the installment payment of the loan. It is a process of spreading out or gradual repayment of a loan or a debt over a period of time, such as monthly payments on a mortgage loan (house or auto) into a series of fixed payments. And in amortization, when we say term of the loan, this refers to the total number of payments. And we need to have the amortization table. This is a table or chart that shows the installment payment schedule for the period of payment. This shows how much each payment goes to interest and how much goes to principle. Let's have an example. Assume that you need to pay for 20 years the house and lot you purchased. In how many months will it take for you to fully pay your loan? Since you're plan is to pay the mortgage loan of the house and lot for 20 years, this 20 years is the term of the loan. And to know how many months will it take for you to fully pay your loan, we need to multiply the 20 years by the number of months per year. So we have 20 years times 12 months per year. This gives us a value of 240 monthly payments. This means that 240 monthly payments are needed to fully pay your mortgage loan. This time, the next question is, how much is the monthly payment? To solve for the monthly payment, we need to follow this formula. A is equal to I times P times 1 plus I raised to the power of N all over 1 plus I all raised to the power of N minus 1. What do we mean by these symbols? A refers to the monthly payment, P is the loan's initial amount, I is the monthly interest rate, and N is the total number of payments or the term of the payment loan. Going back to our example, assume that you wish to purchase a house and lot worth Php 2,205,600, and the seller requires a 20% down payment. Then you will loan the balance from a bank that charges 7.5% annual interest rate to be paid for 20 years. The question here, how much is your monthly amortization? And how much is the total interest on your loan? Based on the given problem, we have the following data. The purchase price of the house and lot is 2,205,600. Next is the down payment, which is 20% of the purchase price, and that is 441,120. Next is the mortgage loan amount, subtracting the down payment from the purchase price, we have 1,764,480. The monthly interest rate is equal to 7.5% divided by 12, since the 7.5 is given by year. So to know the monthly interest rate, we have to divide. So the answer is 0.00625. And the total number of payments, which is 20 years, we multiply it to 12 months to make it monthly. So we have 240 months in total. So how much is your monthly amortization? To know the monthly amortization, we need to go back to the formula given by Following the formula, we have the monthly interest rate of 0.00625. times the P, which is the mortgage loan amount of 1,764,480. times the sum of 1 and the interest of 0.00625 raised to N or the total number of payments of 240 months. All over 1 plus I, so we have 1 plus 0.00625 raised to 240 minus 1. Performing the operations here in this formula, we have now the value of A, which gives us 14,214.53. Meaning to say, the monthly amortization is 14,214.53. The second question is, how much is the total interest on your loan? So if we have to pay 14,214.53 for 240 months, the total payment is It is getting the product of the monthly payment and the 240 months. So by multiplying these two, the result of the total payment is 3,411,487.20. So it means to say that you need to pay a total amount of 3,411,487.20 for 240 months. So to find the total interest, all we need to do is to subtract the total payment to the mortgage loan amount.
[11:09]So subtracting these two values, the result is 1,647,007.20. So the total interest that needs to be paid for 240 months is a total of 1,647,007.20. If you are going to look at this value, it is very expensive to get a mortgage loan, because as you can see, even if the interest is only 7.5% per year, you have to pay almost double of the amount that you loan. Let's now learn how to make an amortization table. When we say amortization table or schedule, it is a table that lists each regular payment on a mortgage over time. A portion of each payment is applied toward the principal balance and interest, and the amortization schedule details how much will go toward each component of your mortgage payment. Let's have a sample amortization table. So as you can see here, we have the due date, the monthly amortization, the interest, principal, and outstanding balance. So the amortization table will show you completely the amounts that you need to pay for the term of payment. Going back to our example, the monthly amortization that we have computed is 14,214.53. The mortgage loan amount is 1,764,480, and the monthly interest rate is 0.00625. Keep in mind that even if the monthly amortization is fixed, principal and interest amounts being paid each month vary. And to compute for the amount that goes to the interest and to the principal for each month, we need to take note some procedures. So let's begin with the first month. So to find the interest, we have to multiply the mortgage loan amount by the monthly interest rate.
[13:17]So we have getting the product of these two, the value now is Php 11,028. And this gives us the interest to be paid for the first month. Now, let's find the principal amount. To get this value, we need to subtract the monthly amortization with the interest value. Subtracting these two values, the result is Php 3,186.53. So on the first month, we are just paying the principal amount of 3,186.53. So to know the balance of the mortgage loan, we just have to subtract the principal from the mortgage loan amount.
[14:11]Subtracting these two values, the result is 1,761,293.47. So this is the outstanding balance that still has to be paid on the next month. Working on the second month, we need to follow the same procedure. To get the interest, we have to multiply the balance of the mortgage loan taken from the first month by the monthly interest rate, which is 0.00625.
[14:47]Multiplying these two, the interest value now is Php 11,008.08. To get the principal value for the second month, we have to subtract the monthly amortization with the interest value. The answer here is Php 3,206.45. Next is to find the outstanding balance, we have to subtract the principal from the balance mortgage loan amount from the previous month. And the result here is 1,758,087.02. If you are going to continue this process, you will be able to make a complete amortization table. The process of calculating interest based on the balance continues until the mortgage loan is paid off. As you can see here, each month, the interest value diminishes, while the amount of loan to be paid or the principal increases. And after 240 payments, the mortgage is fully paid off. So just to show you a sample monthly amortization for four months, we have these values. Here are the important concepts that we have to take note. When we say mortgage, it is a process that will let you not to pay for the whole cost of the property purchased immediately. And when we say down payment, it is a certain percent of the purchase price of the property, and it's being paid first. Amortization refers to the installment payment of the loan. And the formula for the monthly payment is given by this. This is the end of our discussion about mortgage and amortization. I hope you have learned a lot about these two. Thanks for watching. Please don't forget to like and comment on this video. Bye everyone. See you on our next video.
