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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Amortization on an owner-financed mortgage
Dear Dr. Don,
Someone we know bought my parents' house. They
made an agreement with my dad and me that that buyer would make monthly
payments to my dad until dead or incoherent and then make any remaining
payments to me.
I care for my dad now, and I don't know how to calculate interest
or principal. The original agreement was $47,000 at 10 percent annual
interest with $500 monthly payments. Those payments took place between
March 15, 1999 and Dec. 15, 2003. The payments were changed to $1,000
monthly at 7 percent annual interest starting with the Jan. 15, 2004
payment. I need help with calculating interest and principal because
I think he's cheating my dad.
Thank you,
Coni Creditor
Dear Coni,
The typical loan payment calculator and loan amortization schedule
sizes the payment so the loan will be paid off over a predetermined
time period. Your loan agreement specifies the interest rate and
the payment, leaving the loan term open ended. The loan continues
at the contractual payment level and interest rate until it's paid
off.
It's not hard to construct a custom loan amortization schedule.
That way you'll know that you're getting all the monies due to the
family from the homeowner.
Take the annual interest rate and divide by 12. That gives you
the monthly interest rate.
Since the annual rate is now 7 percent, the monthly rate is .58
percent. Multiply .0058 times the current loan balance and you have
the interest expense for the month.
Subtract the interest expense from the loan payment. Whatever isn't
going to paying interest goes toward paying down principal. The
principal repayment reduces the loan balance giving you the new
loan balance that you'll use to calculate next month's interest.
The table below shows how the loan started, the change
in terms, and when it should end given that the homeowner continues
to meet the loan terms. I'm sending you the entire table for your
records but don't have the column inches to spare here.
| Beginning
Date |
Balance |
Payment |
Interest |
Principal
Repayment |
Ending
Balance |
|
3/15/1999
|
$47,000.00
|
$500
|
$391.67
|
$108.33
|
$46,891.67
|
|
12/15/2003
|
$39,136.92
|
$500
|
$326.14
|
$173.86
|
$38,963.06
|
|
1/15/2004
|
$38,963.06
|
$1,000
|
$227.28
|
$772.72
|
$38,190.34
|
|
8/15/2007
|
$1,321.70
|
$1,000
|
$7.71
|
$992.29
|
$329.41
|
|
9/15/2007
|
$329.41
|
$331.33
|
$1.92
|
$329.41
|
$0
|
Here's hoping that cheating isn't an issue and that the loan continues
to work out for both sides. If there's any doubt as to which family
member needs to declare the interest income on their taxes, you
should discuss it with your tax professional.
-- Posted: May 14, 2004
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