Amoritization Simulator Application

• With user input for home price, percent down, interest rate, and term length we can determine the monthly payment
• The following walks through an example for a $500,000 home where the buyer put 20% down and receives a 30-year loan at 3.75% APR

price <- 500000; per.down <- 0.2; rate <- 0.0375 / 12; n <- 30 * 12
monthly.payment <- (rate * price * (1 - per.down) * ((1 + rate)^n)) / (((1 + rate)^n) - 1); monthly.payment

## [1] 1852

• To determine the interest they will pay over the life of the loan, we use the following

base.total.interest <- (monthly.payment * n) - (price * (1 - per.down)); base.total.interest

## [1] 266886

• One way to reduce the estimated interest cost over the life of the loan is to chip in extra principal with the monthly payment
• If this homeowner contributes an extra $200 each month with his or her payment, they can cut their interest cost significantly as interest owed is a function of how much principal is left on the loan
• They will also pay off the loan sooner

extra <- 200
new.n <- log(((monthly.payment + extra) / rate) / (((monthly.payment + extra) / rate) - (price * (1 - per.down)))) / log(1 + rate)
new.interest <- ((monthly.payment + extra) * new.n) - (price * (1 - per.down))
interest.savings <- base.total.interest - new.interest; interest.savings

## [1] 49127

• The interest cost of a home mortgage is significant due to the power of compounding interest, but paying in extra principal can reduce this cost over the life of the loan
• To reap this benefit, decide what you can afford to contribute each month, and use the Amoritization Simulator application to determine exactly how much money that will save you
• With the application, you could also factor in other variables to reduce the interest cost such as refinancing (getting a lower interest rate), putting in a greater portion of the price as a down payment, and selecting a shorter loan term