Present Value and Mortgage Mathematics Silica Polocoser June 7, 2012

Three Case Studies

Case One
Current Conditions 24 years 9 months left Payoff value = $203,522 Interest rate = 6.125% Payment = $1330.67

Present Value and Mortgage Mathematics

Three Case Studies

Case One
Current Conditions 24 years 9 months left Payoff value = $203,522 Interest rate = 6.125% Payment = $1330.67

Present Value and Mortgage Mathematics

Three Case Studies

Case One
Current Conditions 24 years 9 months left Payoff value = $203,522 Interest rate = 6.125% Payment = $1330.67

Present Value and Mortgage Mathematics

 General formula for PV across multiple periods: PV = FV / (1+r)

N

Present Value and Mortgage Mathematics

 General formula for PV across multiple periods: PV = FV / (1+r)

N

PV is the present value FV is future value

Present Value and Mortgage Mathematics

 General formula for PV across multiple periods: PV = FV / (1+r)

N

PV is the present value FV is future value r is the total expected rate of return
r includes the risk free and risk premium rates r is called discount rate when solving for PV

r is called rate of return when solving for FV N is the number of periods between FV and PV

Present Value and Mortgage Mathematics

 General formula for PV across multiple periods: PV = FV / (1+r)

N

PV is the present value FV is future value r is the total expected rate of return
r includes the risk free and risk premium rates r is called discount rate when solving for PV

r is called rate of return when solving for FV N is the number of periods between FV and PV If FV and PV are known the rate of return can be found by the formula: 1/N r = (FV/PV) 1

Present Value and Mortgage Mathematics

Calculating in Excel by using the PMT Function

Command line =PMT(rate,nper,PV,FV,[type])

Present Value and Mortgage Mathematics

Calculating in Excel by using the PMT Function

Command line =PMT(rate,nper,PV,FV,[type]) Rate is divided by 12 (how many months in a year) Nper term is used for annuity, multiplied by 12

Present Value and Mortgage Mathematics

Calculating in Excel by using the PMT Function

Command line =PMT(rate,nper,PV,FV,[type]) Rate is divided by 12 (how many months in a year) Nper term is used for annuity, multiplied by 12 PV term is present value (mortgage amount needs to be negative) FV term is future value (needs to blank or zero)

Present Value and Mortgage Mathematics

Calculating in Excel by using the PMT Function

Command line =PMT(rate,nper,PV,FV,[type]) Rate is divided by 12 (how many months in a year) Nper term is used for annuity, multiplied by 12 PV term is present value (mortgage amount needs to be negative) FV term is future value (needs leave it blank or zero) Type is beginning (1) or end (0)of the of the billing cycle (used1 )

Present Value and Mortgage Mathematics

Case one
Current Conditions 24 years 9 months left Payoff value = $203,522 Interest rate = 6.125% Payment = $1330.67

Present Value and Mortgage Mathematics

Case one
Current Conditions 24 years 9 months left Payoff value = $203,522 Interest rate = 6.125% Payment = $1330.67 i = 6.125% / 12 = 0.510416% n = 24x12+9 = 297 Current PV = $203,522 Payment would be the fixed $1330.67

Present Value and Mortgage Mathematics

Case one
Current Conditions 24 years 9 months left Payoff value = $203,522 Interest rate = 6.125% Payment = $1330.67 i = 6.125% / 12 = 0.510416% n = 24x12+9 = 297 Current PV = $203,522 Payment would be the fixed $1330.67 Staying with current loan Interest paid from A=63 would be $193,016

$219,000

$203,522

i = 6.125%

..........
0 1 2 3 4 5 6 . 63 A = $1330.67 $193,016 Present Value and Mortgage Mathematics
355 356 357 358 359

360

Case one

Present Value and Mortgage Mathematics

Case one
In excel
=SUM(D77:D374)

In excel
= B15*(B4/12)

Present Value and Mortgage Mathematics

Case Two

$148,770 Present Value and Mortgage Mathematics

Case Two
i = 4.0% / 12 = 0.333% n = 30x12= 360 Loan PV = $207,000 Excel =PMT(0.333%,360,207000,,) A = $988.25 Total interest = $148,770

Present Value and Mortgage Mathematics

Case Two
i = 4.0% / 12 = 0.333% n = 30x12= 360 Loan PV = $207,000 Excel =PMT(0.333%,360,207000,,) A = $988.25 Total interest = $148,770 $207,000

i = 4.0%

..........
0 1 2 3 4 5 6 7 8 9 A = $988.25 $148,770 Present Value and Mortgage Mathematics
355 356 357 358 359

360

Case Three

Present Value and Mortgage Mathematics

Case Three

$208,000

i = 3.0%

i = 4.0%

i = 5.0%

i = 6.0%

i = 7.0%

i = 8.0%

1 2 3 ... 60 61 6272 73 74 84 85 86 96 97 98 108 109 110.. 355 356 357 358 359

Present Value and Mortgage Mathematics

Case Three

$208,000
$185,339 i = 3.0% i = 4.0% i = 8.0%

i = 5.0%

i = 6.0%

i = 7.0%

1 2 3 ... 60 61 6272 73 74 84 85 86 96 97 98 108 109 110.. 355 356 357 358 359
A = $876.94

$29541

Present Value and Mortgage Mathematics

Case Three

$208,000
$185,339 i = 3.0% $181,307

i = 4.0%

i = 5.0%

i = 6.0%

i = 7.0%

i = 8.0%

1 2 3 ... 60 61 6272 73 74 84 85 86 96 97 98 108 109 110.. 355 356 357 358 359
A = $876.94 A = $978.29

$29541

$7333

Present Value and Mortgage Mathematics

Case Three

$208,000
$185,339 i = 3.0% $181,307 $177,636 $174,511 $171,854 i = 8.0%

i = 4.0%

i = 5.0%

i = 6.0%

i = 7.0%

1 2 3 ... 60 61 6272 73 74 84 85 86 96 97 98 108 109 110.. 355 356 357 358 359
A = $876.94 A = $978.29 A = $1082.22 A = $1165.26
A = $1252.57

$29541

$7333

$8974

$10558

$12106

Present Value and Mortgage Mathematics

Case Three

$208,000
$185,339 i = 3.0% $181,307 $177,636 $174,511 $171,854 i = 8.0%

i = 4.0%

i = 5.0%

i = 6.0%

i = 7.0%

1 2 3 ... 60 61 6272 73 74 84 85 86 96 97 98 108 109 110.. 355 356 357 358 359
A = $876.94 A = $978.29 A = $1082.22 A = $1165.26
A = $1252.57 A = $1343.99

$183,451

$29541

$7333

$8974

$10558

$12106

Present Value and Mortgage Mathematics

Case Three

$208,000
$185,339 i = 3.0% $181,307 $177,636 $174,511 $171,854 i = 8.0%

i = 4.0%

i = 5.0%

i = 6.0%

i = 7.0%

1 2 3 ... 60 61 6272 73 74 84 85 86 96 97 98 108 109 110.. 355 356 357 358 359
A = $876.94 A = $978.29 A = $1082.22 A = $1165.26
A = $1252.57 A = $1343.99

$183,451

$29541

$7333

$8974

$10558

$12106

$251,963 Present Value and Mortgage Mathematics

SUMMARY
Case One Current Conditions 24 years 9 months left Payoff value = $203,522 Interest rate = 6.125% Payment = $1330.67 Total Interest = $193,016

Present Value and Mortgage Mathematics

SUMMARY
Case One Current Conditions 24 years 9 months left Payoff value = $203,522 Interest rate = 6.125% Payment = $1330.67 Total Interest = $193,016

$988.25 Total Interest = $148,770

Present Value and Mortgage Mathematics

SUMMARY
Case One Current Conditions 24 years 9 months left Payoff value = $203,522 Interest rate = 6.125% Payment = $1330.67 Total Interest = $193,016

$988.25 Total Interest = $148,770

Present Value and Mortgage Mathematics

The winner is

$988.25 Total Interest = $148,770

Present Value and Mortgage Mathematics