Amortization Template Homework #2 - Name, Questions 1 & 2 ✓ Solved

Amortization Template Homework #2 Name Question 1 Question 2

Objective: To create a mortgage amortization spreadsheet and compare APR for alternative loans.

Question 1: Loan amortization Consider the loan information in the “Amortization Template” Excel spreadsheet:

  1. Fill in the blank blue cells in the Mortgage Information section.
  2. Complete the mortgage amortization schedule.
  3. Insert the graphs for:
    1. Interest & Principal payments.
    2. Ending balance.

Question 2: APR comparison

  1. Fill in the blank blue cells to compare the two loans’ APRs.
  2. Briefly comment on the result. Which loan would you choose? (A couple sentences is sufficient.)

Paper For Above Instructions

The amortization process is critical for homeowners as it allows them to understand their mortgage payments over time. In this paper, we will examine how to create a mortgage amortization spreadsheet and compare APRs for different loans utilizing the provided loan information.

Understanding Amortization

Amortization refers to the process of spreading out a loan into a series of fixed payments over a specified period. In the case of mortgages, it is vital to comprehend how monthly payments are applied toward both interest and principal. With most loans, early payments will apply more toward interest, while later payments focus on paying off the principal. This characteristic can significantly affect the total interest paid over the life of the loan.

Creating the Amortization Schedule

To create an amortization schedule based on the given loan information, we start by filling in data for two loans (Loan A and Loan B) according to the parameters provided. For Loan A, we see a loan amount of $280,000 with an interest rate of 3.85% specified. Calculating the monthly payment for this loan qualifies as the first step, which can be performed using the standard mortgage formula:

M = P[r(1 + r)^n] / [(1 + r)^n – 1]

Where M is the total monthly mortgage payment, P is the principal loan amount, r is the monthly interest rate, and n is the number of payments. After computing the monthly payment, we will apply the remaining formulas to compute the amortization schedule for the specified term of 30 years.

Completion of the Amortization Schedule

The completed amortization schedule will demonstrate how each payment contributes to paying down the loan. For each month, the beginning balance reduces as payments are applied toward the principal. By following the loan terms throughout the schedule, we can chart the beginning balance, interest, principal, and end balance over the entire loan term.

Moreover, additional graphs will visualize both interest and principal payments over time along with the ending balance of the loan. These can be developed using graphing tools available in Excel, offering a clear representation of how payments fluctuate throughout the term of the loan.

APR Comparison

The next step involves comparing the APR for Loans A and B. Loan A has an APR of 4.10%, whereas Loan B has a lower APR of 3.79%. The APR provides a broader measure of the cost of a loan as it includes not only the interest rate but also any additional costs involved in securing the loan, allowing borrowers to understand their true cost of borrowing.

Upon comparing the APRs, we can observe that Loan B, despite having upfront points associated, ultimately presents a more advantageous total cost of borrowing. Therefore, the recommendation would lean towards Loan B due to its lower APR. Lower APR translates into lesser overall costs when accounted over the full lifespan of the mortgage.

Conclusion

The crafting of an amortization schedule is not only a necessary task for understanding one's financial obligations but also becomes an essential practice for sound financial planning. Through this exercise, a detailed analysis of how loans behave over time is achieved, providing critical insights into payment structures and overall costs linked with mortgage options.

References

  • Consumer Financial Protection Bureau. (2019). How Do Mortgages Work?
  • Hoffman, J. (2020). Financial Literacy: Understanding APR and Amortization. Journal of Financial Education.
  • Keown, A. J., & Martin, J. D. (2021). Financial Management: Principles and Applications (12th ed.). Prentice Hall.
  • Investopedia. (2023). Amortization Definition. Retrieved from Investopedia
  • National Association of Realtors. (2022). Understanding Mortgage Amortization.
  • Moody's Analytics. (2021). Home Mortgage Disclosure Act: Analyzing Mortgage Costs.
  • Federal Housing Finance Agency. (2023). Mortgage Interest Rates: History and Trends.
  • Bankrate. (2023). How to Calculate Your Monthly Mortgage Payment.
  • United States Department of Housing and Urban Development. (2022). Understanding Adjustable Rate Mortgages.
  • Harris, M. (2023). The Importance of the Amortization Schedule in Financial Planning. Financial Planning Review.

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