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9 Steps to Get Out of Debt – Part 3

Step 3 – Analyze Your Debt

The next step is to figure out exactly how much you owe. First, make a list of every debt you have. Not just credit cards, everything. Credit cards, department store credit, mortgages, car payments, unpaid past-due bills, student loans — everything.

You do not need to count items such as recurring bills like electric, gas, cable, etc. These are not debt, they are recurring expenses. At any time you could shut these off and not owe any additional money, although it may make life unpleasant, to say the least.

Once you have a list of what you owe, you need to determine what your remaining balance is on each item, the current interest rate and your monthly payment for each debt. On most loans you’ll be able to find this information on your monthly bills. However, you may have to make some phone calls to get this information for other debt. Add the remaining amount on each of these items together, this is your total amount of debt. Also, add together your monthly payments for each of these debts to determine the total monthly cost of your debt.

Now, you need to determine how much this debt is going to cost you if you continue making the payments you currently are. You can do this by completing an amortization table for each debt. Don’t worry, we’re not going to make you do this yourself, you can use our amortization calculator located at destroydebt.com. This will tell you two key pieces of data: how much each debt is going to cost you, and when it will be paid off. Add the total cost of each loan together; this is the total cost of your debt. This number can be scary at first, but don’t get too worried yet, this should be the last time you see this number.

If your total monthly debt is greater than 50% of your net monthly income, or you have found yourself in a situation where you are unable to pay your bills and have fallen behind by several months, I would suggest you stop here and seek the advice of a professional financial counselor. Otherwise, continue on.

By: Jeremy Zongker

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Posted in Finance · July 29th, 2010 · Comments (0)

Home Improvement Loan Calculators

Home improvements loan are paid off within a specified period of time. They are considered amortized loans, since they are to be paid off by a gradual shrinkage by equal monthly installments.

In the age of information technology, there are many online loan amortization calculators available that can help a borrower weigh the various loan options he/she has and plan the payments accordingly. Home improvement calculators are available abundantly on the internet. These calculators offer ease in trying out various combinations of the payment period.

When using these calculators, one just needs to key in the loan amount, interest rate, and the conditions of repayments. The online home improvement loan amortization calculator gives the borrower the complete amortization table within few seconds; the table tells him/her how much of loan is being paid off. The breakdown of the monthly payments is given over the life of the loan.

Some of the more advanced home loan calculator programs allow a borrower to calculate various ratios like the debt-to-income ratio in different payment scenarios. By using these home improvement loan calculators, one can find out the amount to borrow, how much to put down, and the tax implications. With the help of home improvement calculators, one can make decisions about opting for fixed- or adjustable-rate mortgages

One should use variations of the basic home loan calculator to decide whether and how to consolidate debt. One can also calculate how long it will take to reach the “break even” point. The impact of early payments on your home loan can also be easily determined.

Thus, with the help of online home improvement calculators, it is very easy to plan the loans.

By: Alison Cole

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Posted in Real Estate · July 17th, 2010 · Comments (0)

Simple Interest Rate Amortization Schedules Explained

Amortization schedules are important simply because they show you how each mortgage payment breaks down into its two parts, principal and interest. With this knowledge, you can adjust your payments to include future principal payments which in turn will save you from paying their corresponding interest payments.

This means if a particular payment is split up in such a way that requires $200 in principal and $1000 in interest be paid, you can save the $1,000 by paying the $200 before this payment is due. In making these types of adjustments, you can save tens of thousands of dollars because you will economically be shortening the term of the mortgage.

Simple Interest Vs. Compounded Interest

I have been asked about simple interest amortization schedules. They’re really isn’t too much to explain. The opposite of simple interest is compounded interest. No compounding takes place in the paying of a mortgage. So, all amortization schedules are simple interest. Let’s prove this supposition.

On a $200,000 mortgage at six percent for two years, we can see when looking at this mortgage’s amortization table, the 25th payment has a principal due of $224.42. When we look at the 26th payment we can see that the interest due is $974.68. The total amount due on the mortgage before the 25th payment is paid is $194,936.47. To borrow this amount of money for one month would cost $974.68.

How do we know this? One way is to look at the amortization table and see what the interest is on the 25th payment. Another way to find out would be to calculate this longhand. Here’s how to do that:

$194,936.47 times 6% divided by 12 equals $974.68. Take note that six percent divided by 12 gives us the interest rate for one month. You can easily see there is no compounding taking place here. Here’s what would happen if compounding took place. The amount due monthly on the same mortgage is $1,199.10. If you were to pay this amount of money each month into a savings account whose interest compounded monthly, after 28 years your investment would be $1,046,459.33.

The significance of 28 years is that it is the amount of time from the end of the loan working backward until the 25th payment is due. At the time of this payment, as we previously discussed, the amount due on the mortgage is $194,936.47. So this proves amortization schedules are simple interest.

Interest Only Amortization

Sometimes people mistakenly use the term simple interest when they are referring to interest only. With an interest only loan, no amortization takes place. For instance, $200,000 borrowed at six percent on an interest only loan would require a payment of $1,000 each month. This $1,000 would pay nothing toward the principal, so the loan would not be amortizing. In other words, at the end of any time period from one month until infinity, the amount of principal owed would always be $200,000.

Variable Rate Mortgage Amortization

Another case in mistaken identity is referring to a simple interest amortization schedule when a person wants to refer to an amortization table for fixed interest rate mortgages opposed to a variable interest rate mortgage.

To make an amortization table for a variable interest rate mortgage, you would have to know exactly what the interest rate would be at each point throughout the term of the loan. This is impossible because variable interest rate mortgages are built on the premise the mortgage rate could go up or down. Therefore, there is no such thing as a variable rate amortization table.

So a simple interest rate amortization table is the only amortization schedule available and it is a very important piece of mathematical equations. Knowing how to use it can save you a lot of money on your mortgage. Here’s one way:

Look at the principle on the payment at the halfway point of the schedule. This would be payment number 181 on a thirty-year mortgage. Here, you would look at the principle part of the payment. If you took this amount of money and added it to each monthly payment, your mortgage would be paid in half the time.

By: Edward Lathrop

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Posted in Real Estate · June 14th, 2008 · Comments (0)

How to Build an Amortization Table and the Benefits it Provides

When a person takes a loan for a house, a car or any other major purchase he/she is making a large commitment that may involve monthly payments for up to 30 years. That means a total of 360 payments, a large commitment over a long period of time. A loan is something that needs to be taken seriously. The borrower is at a huge advantage when entering an obligation like this is he is aware of four items before even talking to a loan officer.

1. The expected payment.

2. The impact the interest rate has on the loan.

3. Where the borrower will stand with respect to the loan at any given time in the future.

4. The impact on a change in the interest rate if a variable interest loan is entered into.

The answers to all of these questions are provided with an amortization table. In this article I want to show you how to quickly and easily build and amortization table. In so doing we will find the answers to the four points mentioned above.

Loan Payment

If you have not taken out the loan yet, the first thing that you want to do is to calculate what your expected loan payment will be. If the loan has already been entered into you already know the answer to this question. For those who are pro-actively looking into a major purchase I will quickly show how to calculate what the loan payment will be. This can be done very easily in Microsoft Excel. Many hand calculators provide this calculation too. I will demonstrate with the use of Excel.

The structure of the “Payment” formula looks like this: =PMT(annual interest rate/12, number of periods (months), present value).

For example: If you are going to buy a $300,000 house and pay for it over 30 years (360 months) and you have negotiated a fixed interest rate of 6%, here are the exact entries you would make in Excel:

=PMT(.06/12, 360, 300000)

And our answer would be $1,798.65. Our monthly payment will be $1,798.65.

Before we proceed with building the table you may want to look at the total amount paid. $1,798.65 per month x 360 (months) = $647,514 dollars. More than double your initial purchase cost. Now let re-calculate the same house loan for 20 years and see what the differences are.

=PMT(.06/12,240,300000)

The monthly payment will be $2,149.29.

$2,149.29 x 240 = $515,830. If you paid for the house in 20 years you would be paying $350.64 more per month but you would pay a total of $131,684 less. A serious consideration to make before entering into a loan is how long you are going to have the loan for. Of course, with most home loans you can make additional payments but when a loan is taken out for a certain dollar amount, that amount usually goes into your budget and it is hard to keep up consistent payments above it.

Let us assume that our borrower looked over the facts and decided that a 20 year loan was better for him. He liked the idea of saving $131,000 over the life of the loan.

So far we have agreed on a price for the house ($300,000) and decided on the term (20 years). Interest is another thing that is sometimes slightly negotiable. In fact, with a shorter loan you may be able to get a discount on the interest charged. And remember, one tenth of a percentage point makes a difference over 30 years. In our example we can assume that 6% is the best possible interest rate.

Building the Amortization Table

When I do an amortization table I put three data points right at the very top on the left hand side, like this:

Initial Value: $300,000

Interest Rate: .06%

Term: 240 months

Then we need to add the following columns:

Number

Date

Beginning Balance

Payment

Interest

Repayment of Principle

Ending Balance

For period one the data would be:

Date: 1/1/2008

Beginning Balance: $300,000.00

Payment: $2,149.29 (the value we calculated above)

Interest: $1,500.00

Repayment of Principle: $649.29

Ending Balance: $299,350.71

For period 2 we would have:

Date: 1/1/2008

Beginning Balance: $299,350.71 (the same as th ending balance from the previous period)

Payment: $2,149.29 (with a fixed interest rate this value stays the same)

Interest: $1,496.75

Repayment of Principle: $652.54

Ending Balance: $298.698.17

Of course, you would put this all in an excel table and here are the formulas you would use.

Uner the Number column we will enter 1-360, the number of the payment. Beginning Balance will for the first month be $300,000 and for each subsequent month it will be the previous month minus the Repayment of Principle. For example, for period 1, the beginning balance is $300,000 and the repayment of principle is $649.29 so the beginning balance in month 2 is $299,350.71. The Payment will be the same every month as long as the interest rate does not change. We calculated the payment to be $2,149.29 per month. The Interest will be the Beginning balance for the month multiplied by .06 and divided by 12. For the first month take $300,000 x .06 /12 = $1,500.00. The Repayment of Principle will be the Payment minus the Interest. For the first month repayment of principle will be $2,149.29 – $1,500 = $649.29. The Ending Balance is calculated by Subtracting the Repayment of Principle from the Beginning Balance. $300,000 – $649.29 = $299,350.71.

The values for the last two months of data are as follows:

Number: 239

Date: 11/1/2027

Beginning Balance: $4,628.01

Payment: $2,149.29

Interest: $21.34

Repayment of Principle: $2,127.95

Ending Balance: $2,140.06

Number: 240

Date: 12/1/2027

Beginning Balance: $2,140.29

Payment: $2,149.29

Interest: $10.70

Repayment of Principle: $2,138.59

Ending Balance: $1.47

Note that on your last payment (240 in this case) the ending balance should be very close to $0. In this case it is $1.47 which represents a number as close to $0 as could be arrived at without paying a percentage of a cent every month.

Benefits of the Amortization Table There are several benefits of having an amortization table before you enter a loan as well as after the loan has been agreed upon and signed.

1. You will be able to see, on paper, what your loan will look like for the entire period. This will cause a person to stop and consider, is this the best method of obtaining whatever am I buying? Should I pay over a shorter (or longer) period? Am I over-extending myself? Having facts and figures down on paper, for you to look at, helps in the decision process.

2. If you want to know exactly where you are or where you will be at a certain time in the process of paying off the loan you have the figures right in front of you.

3. If the interest rate changes you can easily adjust the interest column and see what the impact will be.

4. It will act as a check and balance against the agency you take the loan from. If there are any “hidden” charges in the loan that you are not being told about you will be able to spot them quickly. If their payment amount does not match up to yours either exactly or within a couple of pennies, something is amiss.

5. It will help greatly in the bargaining process. It is much easier to bargain with a sales or finance person if they see that you are intelligent about the subject and know they cannot sell you a bag of hot air.

Conclusion I highly recommend building an amortization table before a major purchase is made. It will help you make the decision as to how long of a loan you should enter into, what the impact of the interest rate is and the impact of a change in interest rates. It will also help in the bargaining process when making a large purchase. If you follow the instructions here, it is really a very simple process and well worth the time and effort.

By: Tom Thorne

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Posted in Finance · January 8th, 2008 · Comments (0)

All About Useful Amortizations

Applying for a loan can be a daunting task for a consumer. Everyone worries about the prime lending rate, loan terms and such. So it is important to know a little about how these things are calculated.

An amortization table is exactly what you need to look at before you take out any loan. Ask your lender to show you one prior to the signing.

An amortization schedule is a report that spells out in detail the effects of each payment on a loan throughout the life of that loan. This is typical of a mortgage loan since they are long term at 25 to 40 years, but can be used on any type of loan. Car loans, personal loans and student loans can all be reviewed using an amortization schedule.

Every loan is split into two pieces: the principal (what you are borrowing) and the interest (what you pay for the loan). An amortization table breaks down each payment and tells you how much of your payment is going to interest and how much goes towards paying down the principal.

At the beginning of the loan, a large part of the payment goes towards interest with very little going to the principal pay down. The amount going to the principal increases as the term progress Usually, the final payment is somewhat lower than the previous ones.

Additionally, the amortization chart shows interest paid to date, principal paid to date and principal remaining after each payment.

As you can already see, this is a valuable tool for the savvy consumer to properly decide on the right loan deal.

The formula is very involved and looks like this where P=Payment, I=interest and n=number of payments:

P= I x principal x (1+I) x n / (1 + I) x n

You could try that for your self or just use one of the many free amortization calculators like the one at http://www.amortization-calc.com/.

Aside from getting this information from a lender, there are quite a few companies that sell amortization software like Slateboard’s Quick Calc Pro Amortization software. See it at http://www.slateboard.com/pro_quikcalcpro.htm

With the software in hand, you could easily preview the financial impact of any loan you are considering. Look for the best rate, put it into the calculator and figure exactly what the payments will be for a given term.

This is especially useful when considering a re-finance or re-mortgaging. What happens is that all of the interest paid on the original loan is lost. The re-finance stars the process all over again.

There are also several different types of amortization schedules including linear, declining balance, annuity, bullet (all at one time) and increasing balance (negative amortization). Of these, the most common one is linear.

Almost any financial web site has calculators available freely. Simply Google “amortization calculators” and you will see a plethora of free ones to choose from. Software like that mentioned above is also available openly either at your favorite software store or online. Again, just Google “amortization software”.

A little knowledge goes a long way and using an amortization schedule is good preparation and even better foreknowledge.

By: Rita Lambros-Segur

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Posted in Real Estate · July 6th, 2007 · Comments (0)

Mortgage Calculator or Amortization Table?

Both a mortgage calculator and an amortization table can be used to find out the monthly payment required on the property you would like to buy, but they approach the calculation differently.

Although they have similar functions, the mortgage calculator and the amortization table each have their own place in your mortgage control system.

Mortgage calculators range from ones that calculate a simple loan, to those that can work out exactly how much you can afford, to those that will determine how much you can borrow for a home loan depending on your current situation. Mortgage calculators are a good way for you to get a general idea of what you need.

An amortization table, on the the other hand, is an extensive spreadsheet of every detail of each type of loan, length of loan, interest rate, and many other factors that can confuse a novice.

A mortgage calculator may not give you as much information as an amortization table, but it may present basic information clearer and quicker. Once you have a good idea what you want in a loan, then an amortization table can help you delve deeper into the long-term ramifications of the loan.

They can be used separately, but their strength lies in a combination of both to enable a closer watch of the financial picture of your mortgage.

By: Karen Kirby

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Posted in Real Estate · May 26th, 2007 · Comments (0)

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