MORTGAGE AND

AMORTIZATION
Lesson 11
MORTGAGE

A Mortgage can be defined as an

agreement by which a debtor pays
the lender (usually a financial
institution like a bank) for a certain
property over a period of time.
However the term “mortgage” can
also refer to loan itself. Sometimes
it is also called principal amount of
loan.
MORTGAGE

An important consideration in a
mortgage is that, unlike in other
loans or debts, an actual physical
entity, which is the property itself,
serves as the security or collateral
for mortgage loan. If the borrower
fails to pay for the loan, the
collateral (which is the property) will
be forfeited.
MORTGAGE

To further illustrate the concept of

mortgage, consider this situation.
Suppose you have saved P200,000
and you are planning to buy a
house that costs P1,000,000. Since
your savings is not enough to fully
pay for the house in cash, you can
apply for the mortgage from a
bank.
MORTGAGE

The remaining balance which is the

amount loaned from the bank, is
the mortgage. So in this situation,
the mortgage (which we denote as
M) is the difference between the
cost of the house and the down
payment; that is
M = 1,000,000 - 200,000 = 800,000
AMORTIZATION

When the bank approves your

mortgage loan, you can pay it back
to the bank on a periodic,
installment basis. The amount that
you need to pay based on the
based on the agreed upon schedule
is- fro example, on a monthly basis-
is called amortization.
AMORTIZATION
Amortization may be thought as the
process of dividing the value of a loan by
paying a certain fixed amount
periodically.

To determine the periodic payment that a

borrower needs to settle based on the
mortgage and payment terms that a bank
applies, we can use the following
formulas:
 PERIODIC PAYMENT FOR
MORTGAGE
Let P be the principal amount, r
be the interest rate, n be the
number of payments per year
and t be the total number of
years during which the mortgage
will be paid. Then the periodic
payment PM can be calculated
using the following formula:
 PERIODIC PAYMENT FOR
MORTGAGE

PM = P( )
1- (1+
Observe that when we need to determine
the monthly amortization for the
mortgage, we just need to use n=12 in
the given formula; hence the formula is:
PM = P( )
1- (1+
 DETERMINING THE MONTHLY PAYMENT
FOR A MORTGAGE
Suppose you want to buy a house
that cost P1,000,000. You give a
down payment of P200,000 and then
you loan the remaining P800,000 from
a bank. Your agreement with the bank
is that you will pay for the mortgage
on a monthly basis for 10 years and
that the bank will charge a 3% interest
rate, compounded monthly, on your
loan. Determine the amount of your
monthly payment.
 TRY TO SOLVE
Amlong wants to purchase a car that
costs P1,300,000. He will give a down
payment of P300,000 and then he will
loan the balance from a bank that
charges a 7.5% interest rate,
compounded monthly. He also agreed
to pay the bank monthly for 5 years.
1. How much is his monthly
amortization?
2. How much is the total interest on his
loan?
 TRY TO SOLVE
Suppose you are planning to apply
for a housing loan. The lender offers
different interest rates that reflect the
differences in terms of the risks of
shorter-term and the longer-term
loans. The following are the options
that were given to you:
 Option A: The mortgage will be paid
on a monthly basis for 15 years at an
interest rate of 6.25% compounded
monthly.
 TRY TO SOLVE
 Option B: The mortgage will be paid
on a monthly basis for 30 years at
an interest rate of 6.75%
compounded monthly.

1. If you plan to borrow P2,400,000,

how much wil be yourmonthly
amortization in each option?
2. Explain the advantage and
disadvantage of each option.
-END-