Calculating a Mortgage Payment
The basic steps in calculating a mortgage payment are as follows:
- Enter the proper payments per year. You first must type in the appropriate
number (eg. monthly would be 12, quarterly would be 4, etc.), then push the
cream colored key , then
the P/YR key.
- The order of the next three steps is not important, but I recommend that
you follow across the financial tour of your calculator from left to right.
If you do this, then the next step would be to enter in the proper number of
years. You first type the appropriate number, then push the cream colored
key , then the xP/YR
- Now enter the appropriate interest rate per year. This is done by entering
the appropriate annual interest rate as a whole number, not as a decimal
(the calculator will convert it to decimal automatically), then pressing the
- Next enter the amount of the loan (what the bank gives you)
- Finally all that is necessary is push the PMT
Now let's try a problem. Suppose that you borrow $1,000 for five years and
agree to repay the loan in equal, annual installments that will yield the lender
8 percent per year. What would your annual installments would be?
First let's see what we know. We know that you will receive $1,000 today. That
indicates that the Present Value (PV) is $1000 since you receive it at the
beginning. We know that the number of years (xP/YR) is 5. We know that the
annual interest rate is 8% (8 is the I/YR). Finally, we may assume that the
periods per year is one since we are not told it is monthly, quarterly, etc. (If
the payments per year would have been, for example, monthly, the problem would
have read, ". . . yield the lender 8% per year, compounded monthly.")
Now let's compute the problem:
- First we must enter the appropriate payments per year by pushing 1, then
the P/YR key.
- Next we will enter the number of years by pushing 5, then the cream
colored key , then the
- Now we will enter the interest rate per year by pushing 8 and then
pressing the I/YR key.
- Next we enter the Present Value by pressing 1000, then the PV
- Finally, we press the PMT
key to compute the answer. The display then shows -250.46 if the display was
set to show two decimal places. Note that the answer is negative.
This indicates that the direction of the cash flow is out. (This is logical
if we will be getting $1000 today, we must pay $250.46 each year for the
next five years.)
Would you like to review the
mathematics of this calculation?
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Dr. Jerry Belloit with questions or comments about this web site.
Copyright © 2006 Dr. Jerry D. Belloit