First you must define some variables to make it easier to set up: P = principal, the initial amount of the loan I = the annual interest rate
(from 1 to 100%) L = length, the length (in years) of the loan, or at least the length over which the loan is amortized.
The following assumes a typical conventional loan where the interest is compounded monthly. First we'll define two more variables to
make the calculations easier: J = monthly interest in decimal form = I / (12 x 100) N = number of months over which loan is
amortized = L x 12
Now for the big monthly payment (M) formula ... it is:
J
M = P x ------------------------
1 - ( 1 + J ) ^ -N
where 1 is the number one (it does not appear too clearly
on some browsers)
So to calculate it, you would first calculate 1 + J then take that to the -N (minus N) power, subtract that from the number 1. Now
take the inverse of that (if you have a 1/X button on your calculator push that). Then multiply the result times J and then times P.
The one-liner for a program would be (adjust for your favorite language):
M = P * ( J / (1 - (1 + J) ** -N))
So now you should be able to calculate the monthly payment, M. To calculate the amortization table you need to do some iteration
(i.e. a simple loop). Here are the simple steps :
Step 1: Calculate H = P x J, this is your current monthly interest Step 2: Calculate C = M - H, this is your monthly payment minus
your monthly interest, so it is the amount of principal you pay for that month Step 3: Calculate Q = P - C, this is the new balance of
your principal of your loan. Step 4: Set P equal to Q and go back to Step 1: You thusly loop around until the value Q (and hence P)
goes to zero.
Many people have asked how to find N (number of payments) given the
payment, interest and loan amount. The answer to the actual formula is in the book:
The Vest Pocket Real Estate Advisor by Martin Miles (Prentice Hall).
Here's the formula:
n = -1/q * (LN(1-(B/m)*(r/q)))/LN(1+(r/q))
Where:
- q = amount of annual payment periods
- r = interest rate
- B = principle
- m = payment amount
- n = amount payment periods
- LN = natural logarithm
