TARGET SKILLS

At the end of this module, you are expected to:

q prepare amortization schedule; and
q compute interest specifically as applied to mortgage and amortization.

MOTIVATION
Black Board Discussion Post:
1. Why do a lot of businesses still prefer to borrow money despite the cost of
borrowing?

BUILD YOUR UNDERSTANDING

Definition of Terms:

Amortization

It refers to the process of paying loan in with equal sums over a certain period of
time. If a loan is be amortized, both the principal and interest are paid off by
series of equal periodic payments. The series of periodic payments that reduces
the amount borrowed to 0 is called the rent of mortgage.

Formula to be used in determining the periodic payment given the present value
of an annuity.

�(1 + �)�
� = ��
(1 + �)� − 1
Where:
R = amount of payment per period
PV = present value
�
i = interest rate per period ( )
�
r = nominal rate
m = number of compounding periods in a year
n = number of installments or payments (mt)
t = time in terms of years

Example 1:
Krisha borrowed Php 50,000 for the improvement of her sari-sari store. She agreed
to repay the loan in quarterly payments for 2 years at 8% interest compounded
quarterly.

a. How much is her quarterly payment?

b. What is the total amount to be paid?
c. How much interest is included in the total payment?
d. Prepare an amortization schedule for the present value of the loan.

1
Solution:
Given:
PV = Php 50,000
t = 2 years
r = 8%
m=4
0.08
i= = 0.02
4
n = (2)(4) = 8

a. How much is her quarterly payment?

Use the formula:

i(1+i)n
R = PV
(1+i)n −1
0.02(1+0.02)8
R = Php 50,000
(1+0.02)8 −1
R = Php 6,825.49

∴ Her quarterly payment is Php 6,825.49.

b. What is the total amount to be paid?

Total amount to be paid = R x Total number of payments

= Php 6,825.49 (8)
= Php 54,603.92

∴ She will pay a total amount of Php 54,603.92 for 2 years.

c. How much interest is included in the total payment?

Interest = Total amount to be paid - Principal

= Php 54,603.92 - Php 50,000
= Php 4, 603.92

∴ She will pay a total interest of Php 4, 603.92.

d. Prepare an amortization schedule for the present value of the loan.

Payment Periodic Interest Paid Principal Outstanding

Number Payment Repaid Principal
0 Php 50,000
1 Php 6,825.49 Php 1,000 Php 5,825.49 Php 44,174.51
2 Php 6,825.49 Php 883.49 Php 5,942.00 Php 38,232.51
3 Php 6,825.49 Php 764.65 Php 6,060.84 Php 32,171.67
4 Php 6,825.49 Php 643.43 Php 6,182.06 Php 25,989.61
5 Php 6,825.49 Php 519.79 Php 6,305.70 Php 19,683.91
6 Php 6,825.49 Php 393.68 Php 6,431.81 Php 13,252.10
7 Php 6,825.49 Php 265.04 Php 6,560.45 Php 6,691.65
8 Php 6,825.49 Php 133.83 Php 6,691.66 0

Total Php 54,603.92 Php 4,603.91 Php 50,000.01

2
MORTGAGE
It is a real estate loan secured or collateralized by a house and the land it is built. The
lender has the right to foreclose your house and land and sell it if you do not pay the
mortgage.

Two types of Mortgage

1. Fixed-rate: the interest rate does not change over the time of the loan
2. Variable-rate: the interest rate can change depending on the economic situation and
other factors

Mortgage is paid in equal monthly payments. The monthly payment covers the monthly
interest and part of the principal. There are cases where a lender accepts payments above
the assigned periodic payment to decrease the principal of the loan, thus allowing the
borrower to pay less interest for succeeding payments.

Example 2:
Kaye wants to purchase a condominium unit that costs Php 2,500,000. Her mortgage
lender requires a 15% down payment for a 20-year loan. Her monthly mortgage payment
will be Php 15,000. How much should be her down payment? How much is the amount of
mortgage? How much in all will Kaye pay over 20 years? How much will she pay in
interest?

Solution:
Given:
PV = Php 2,500,000
Down payment = 15% of the cost
t = 20 years
Monthly Mortage Payment = Php 15,000

a. How much should be her down payment?

Down Payment = Php 2,500,000 (0.15) = Php 375,000

She needs to give a down payment of Php 375,000.

b. How much is the amount of mortgage?

Amount of mortgage = Php 2,500,000 - Php 375,000

= Php 2,125,000

The total amount of mortgage after the down payment is deducted is Php 2,125,000.

c. How much in all will Kaye pay over 20 years?

Kaye has to do 12 payments in one year. Hence, the total number of payments is240.
Total monthly payments = Php 15,000 (240)
= Php 3,600,000

Kaye will pay a total of Php 3,600,000 in 20 years.

d. How much will she pay in interest?

Total Interest = Total monthly payments - Amount of Mortgage
= Php 3,600,000 - Php 2,125,000
= Php 1,475,000

The total interest to be paid by Kaye is Php 1,475,000.

3
 PRACTICE ACTIVITY :

Answer the following:

1.A used car worth Php 360,000 is sold for a down payment of Php 60,000 and the
remainder to be paid quarterly for 4 years at 12% compounded quarterly after the date of
sale.
a. How much quarterly payment is required?
b. What will be the amount of the payments be?
c. How much interest will be paid?
d. What is the total cost of the property?
e. Prepare an amortization schedule in which quarterly payments will amortize the Php
300,000 loan in 4 years.

2.Bea is purchasing a house for Php 2,000,000. She is making a 20% down payment and
will sign a 30-year mortgage. Her monthly mortgage payment will be Php 10,000. How
much will May over the life of the mortgage? How much will she pay in interest?

SUMMARY OF KEY IDEAS

1. Amortization refers to the process of paying loan in with equal sums over a certain
period of time. If a loan is be amortized, both the principal and interest are paid off by
series of equal periodic payments.
2. Formula to be used in determining the periodic payment given the present value of an
annuity.

�(1 + �)�
� = ��
(1 + �)� − 1
3. Mortgage is a real estate loan secured or collateralized by a house and the land it is
built. The lender has the right to foreclose your house and land and sell it if you do not
pay the mortgage.
4. Two types of Mortgage
a. Fixed-rate: the interest rate does not change over the time of the loan
b. Variable-rate: the interest rate can change depending on the economic situation and
other factors

CHECK YOUR UNDERSTANDING

Answer the following:

1. Mrs. Del Mundo borrowed Php 400,000 to remodel her home. She will repay the loan
in quarterly payments for 10 years. Interest is 8% compounded quarterly.
a. How much is Mrs. Del Mundo’s quarterly payment?
b. How much interest will she pay?
c. How much is the final payment?
d. Prepare an amortization schedule in which quarterly payments will amortize the Php
400,000 loan in 10 years.

2.Mr. And Mrs. Dela Cruz are purchasing a house for Php 3,000,000. They are making a
15% down payment and will sign a 20-year mortgage. Their monthly mortgage payment
will be Php 15,000. How much will they pay over the life of the mortgage? How much
will they pay in interest?