Loan Amortization
Hello again to our readers and followers. In this short entry, I want to introduce you all to our latest tool designed to assist with loan amortization. The concept of how financial institutions determine a borrower’s monthly payment is one not many folks understand. There are likely two parts to this.
One: the formula for amortization is quite abstract, and there are numerous versions online, just depends on which source you use.
Two: financial institutions benefit more from uninformed consumers who don’t understand the means by which loans are underwritten, and principal/interest are calculated. This can be especially true for the two main loans most individuals and families will need; auto and home.
For my courses teaching Python coding to my students, this is one of the projects I give them; build a simple console based amortization calculator. Once they are a little more advanced, I then assign them to build the same logic, only this time using a graphical user interface (GUI). I believe this begins the process of them eventually understanding just how important loan balance and interest are in the total cost of borrowing money.
For my own experience, I made the mistake of purchasing a small town home in 2005, while studying in college. Little did I know, I would pay for this mistake greatly over the next ten years. 2005 was the period leading up to the great recession of 2008. Homes in Miami, Florida were flying off the market and my girlfriend (now wife), and I purchased this town home out of pure desperation. We did what was normal during the times, and qualified for a no-document, no proof of income, and no down payment loan. Any person with a little common financial sense can tell you this is a recipe for disaster and an opportunity for unsavory financial institutions taking advantage of consumers.
We would spend the next ten years digging our way out of the hole we created for ourselves, by not being informed and not using good discretion and the concept of delayed gratification. Thankfully, we did have enough cash flow during that period to not go underwater and foreclose. Following two deployments to Afghanistan, I was able to leave the Army debt free, and we sold the property for a small gain, after taxes, closing fees and realtor fees. The math was skewed a little. In total, I estimate we lost around the $100k mark.
Math:
2005 purchase price: $201K (not including closing costs)
2015 sale price: $165K (net proceeds around $13.5K after cost of sale)
This doesn’t include the nearly seven years we spent dealing with vacancies, repairs, and month to month losses in the difference between rent collected and our costs of owning the home.
Note: HOAs are RIDICULOUSLY expensive in South Florida!
That experience forced me to grow, and made my resolve even greater in future negotiations. When the time came for us to purchase our home last year, my wife and I knew that we would have to come in strong handed. We gave a 30 percent down payment and have aggressively paid additional principal in both monthly amounts and an annual lump sum.
It also made me realize that money provides leverage, and leverage at the negotiation table is power. The closing experience from the bank and through to the lawyers' office where we signed the closing documents was a complete 180 from my experience as a young borrower in 2005. Companies tend to offer better terms when they know you can take your business elsewhere, and that is why I am a staunch critic of the loan brokerage business. It is a catalyst for these organizations to have a “take it or leave it” approach towards their customers.
It is my hope our amortization tool will help others in determining how much loan they wish to take out, and how quickly they can manage to pay the loan down or pay it off completely, in order to save money. In the end, saving on interest costs goes directly into your quality of life.
Dave Ramsey is one of the most well known personal finance gurus, and this is exactly his recipe for sustainable financial health. There is nothing quite like being debt free.
Feel free to take our calculator for a spin. The link is located directly beneath our Blog Topics link. Below is a link to a short demo video of the calculator.
https://youtu.be/P8hTMVR6dgs
Written by:
1. Ron Stephenson
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