How does the amortization formula work?
The amortization formula is based on the formula for calculating the value of the annuity. From this basic formula, you can determine a monthly payment for a fully amortizing loan. You can further modify it to obtain formulas that provide the remaining principle, principal paid in a particular month, interest paid in a particular month and total interest on the loan. PV is the current value, C is a coupon, r is an interest rate and t is the number of periods in the life of a loan. One of the point of view is that the interest rate must be adjusted to suit the length of the period. The rate is usually specified in the anuity contract as an analized data. You want to get an interest rate for one period, divide the analized rate by the number of payment periods in one year. When you buy an annuity, you exchange a lump sum for the promise of the current of the same size payments in regular periods. In the amortizing loan, the creditor provides a lump sum in exchange for a series of monthly payments, in fact he buys an annuity from the debtor.
If you want to set a monthly payment for an amortizing loan, such as a mortgage, just use the loan numbers in the original amortization formula. For example, if the borrower receives a mortgage in USD (USD) for 6 percent of the USD (USD) mortgage, for example, you would involve 300,000 for PV to PV. The interest rate would be a mortgage rate, 6 percent, divided by 12, which is equal to 0.5 percent. T would be 30 years of times 12 payments per year, which is 360. Then you can solve the equation for C, which is a monthly payment for a loan.
The remaining balance before each payment is multiplied by the periodic intestazing ST provides the amount of monthly payment that is directed to interest. The rest of the payment is directed towards the principal. You can use the basic amortization formula to create an amortization plan that shows the amount of principal that is paid every month's payment. The formula can also be used to derive formulas that allow you to calculate the information contained in the ASORTIZATION Plan for DanA period without writing a complete schedule.