Week 2 Calculate Principal and interest Components

Question 1

What are the two components of PMT

Answer 1

interest component ( pays the interest earned by the loan
Principal component( reduces the principal amount

Question 2

How to get interest component

Answer 2

OSBt-1 * EAR

Question 3

How to get principal component

Answer 3

PMT- interest component

Question 4

Amortization Observation on monthly payments…

Answer 4

At the beginning majority of PMT is interest paid to OSB but as time goes on majority of PMT will go towards the principal and less towards interest

Question 5

How to Calcualte Total amount of interest paid over mortgage life

Answer 5

Total interest of mortgage life = PMT*total n - P

Question 6

Three Methods to Save Interest Costs

Answer 6

Increasing Regualr Payments
Lump Sum prepayments
Choose accelerated payment plan

Question 7

Method 1. Increasing regular payments =

Answer 7

1. get effective interest rate
2. get PMT
3. Calculte OSB
4. Calculate reduction in Amortization period by computing N
5. Use new Ammoritization period and subtract from old Ammoritization period to find the total time reduction
6. calculate interest cost reduction by Total interest of mortgage life = PMT*total n - P

Question 8

How to Calcualte Total amount of interest paid over mortgage life with increasing payments?

Answer 8

Total interest of mortgage life = PMT* first time period + PMT*total rest of new new amortization period - P

Question 9

Method 2. Lump sum Prepayments

Answer 9

usually less than or equal to 10 or 15% of initial principal, made same day as regular payment

1. get effective interest rate
2. get PMT
3. Calculte OSB as usual and then subtract lump sum to get correct OSB
4. Calculate reduction in Amortization period by computing N
   5.Use new Ammoritization period and subtract from old Ammoritization period to find the total time reduction
5. calculate interest cost reduction by Total interest of mortgage life = PMT*total n - P

Question 10

Method 3: Choose Accelerated Plan

Answer 10

1. calcualte new effective interest (most likely weekly or biweekly as it is accelerated plan)
   2.get PMT and then divide by new accelerated plan (example PMT= 763.21/accelerated weekly= 4 = -190.80
2. Calculate reduction in Amortization period by computing N
   4.Use new Ammoritization period and subtract from old Ammoritization period to find the total time reduction
3. calculate interest cost reductio