Example 10 - Loan & Series of Extra Payments

This example applies to our online demo Time Value of Money Calculator. The C-Value! program for Windows works in a similar way and has a few more features. Note, our online demo TVM calculator is limited to calculations using interest rates between 4.0% and 5.99%

Conventional loan or mortgage with regular payments plus a series of regular extra principal only payments, starting with the 38th payment.

Note:This topic has not been proofed and images need to be added. However, we believe that the steps are complete and accurate.

1. Click the [New] button to clear any previous entries.
2. Set "Rounding" to "Ignore" by either:

• clicking on the "Rounding" button on the toolbar;
• clicking on the {Compute} menu choice and select {Rounding...};

3. Set "Compounding" to "Monthly"
4. Enter 6.5% for the "Nominal Annual Rate"
5. Create a "Loan" event in row one of the cash flow input area.

1. 1. Set the "Date" to May 1, 2004 (05/01/2004)
   2. Set the "Amount" to $255,600.00
   3. Set the "# Periods" to 1.

6. Click on the second row of the cash flow input area. Select "Payment" for the "Event" type. For this example, we will assume we want to create a schedule for a typical mortgage payable over 30-years. Initially, the regular payment amount is unknown.

1. 1. Set the "Date" to June 1, 2004 (06/01/2004)
   2. Set the "Amount" to "Unknown"
   3. Set the "# Periods" to 360.

7. Calculate the unknown. The result is $1,615.57
8. Next, to prepare to enter the extra payments, the payments in the cash flow screen need to be expanded. To "Expand" the payments, click on the [Expand] button on the button bar.

You should now have a total of 361 rows made up of one loan row and 48 payment rows.

9. Scroll the cash flow area to row thirty-nine. We've decided that we want to make payments that are $200.00 more than the regularly scheduled payment amount. Therefore, change the payment amount (this is the 38th payment) from $1,615.57 to $1,815.57.
10. Sort the payments. (Sort is the opposite of "Expand") by clicking on the "Sort" button on the button bar.

You should now have a total of four rows made up of one loan row, 37 regular payment rows of $1,615.57, the adjusted payment row, and 322 more regular payment rows.

11. Click In the fourth row

1. 1. Change the "Amount" to $1815.57
   2. Change the "# Periods" of payments to "Unknown".

The point of making the extra payments is to save interest expenses, which in turn, shortens the term of the loan. Let's see how this series of extra payments impact this specific loan.

12. Our extra payment will make it so the final payment will have to be an irregular amount. We need to tell TVM calculator how to handle this irregular amount. We do this by setting the rounding option. To set the rounding option, click on the "Rounding" button on the toolbar:

1. 1. The "Rounding Window" will open. We suggest you consider one of two options:

• · If you want the final payment to be less than the regular payment amount, select "Balloon (create an additional payment)".
• · Or if you don't mind the final payment being larger than the regular scheduled payment amount (but less than the amount of two regular payments), you may select "Last Payment" on the "Rounding Window".

1. 1. Make your selection and click the [OK] button to close the rounding window.

13. Click on "Calculate". Our extra payment will make it so the final payment will have to be an irregular amount.

1. • If you selected "Balloon..." as the rounding option, then the final payment will occur at payment number 284 (rather than the original number of payments - 360) and the payment amount will be $775.92;
   • If you selected "Last Payment" for the rounding option, the final payment will occur at payment number 283 and the payment amount will be $2,587.31.

14. And, as usual, if you want to see a detailed amortization schedule showing how the monthly payment is allocated between principal and interest as well as the impact of the "extra payment" amount, click on the "Amortization" tab above the input area.

Back to the online Time Value of Money Calculator.