SLAM TV - Amortized Loans - YouTube

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Hello and welcome to another episode of SLAM TV. We have a special episode for you folks at home today.

We're gonna talk about Amortized Loans and Mortgages.

Luckily for you folk, we have a special, special guest with us today.

He's known as the Mortgages Master, he's the Finance Phenom. He creates Amortization tables

at the dinner table. He's Jay Cho.

Thank you, thank you, thank you.

Jay. How's it going buddy? Hey, how are you doing?

Good. Hey, did you buy that Ferrari yet for your midlife crisis?

Actually, the funny thing is, the other day I went to the dealer...The Ferrari dealer?

Exactly.

I was in line and this lady was like, "If you're going to spend that much money on a car,

why don't you buy a house?" I'm like, oh a house, maybe that's better than a car.

Don't people go broke buying houses?

Ya. Remember the housing bubble [pop].

I know. I think a lot of people are scared to buy houses because so many people bought

houses they couldn't afford and then the house foreclosed and it's like, wow.

Exactly.

So, how do I know if I'm spending too much money on my mortgage?

Right. You don't want to spend all your income on your housing payment.

They recommend no more than 28% of your Gross Monthly Income.

Gross!? Ew. No. That means before taxes. It doesn't mean GROSS.

Oh. Before taxes. Got it. Exactly.

So what is your Gross Monthly Income?

It's about $6,000. Right. So 28% of $6,000?

.28 x 6000 = $1,680. Make sure your payment is no more than that.

The house payment. Okay. So, if I have a 30 year mortgage and I have to make a monthly payment

how many total payments is that going to be?

So you're making a monthly payment

which means 12 times a year.

If you want to do 30 years,

that means 30 x 12 and that is 360 payments.

360 Payments. Cool.

I think I can figure out how much I need to pay per month if I just take

$300,000. So you want to buy a house that is $300,000? Wow. Living large baby.

Let's say I buy a $300,000 house. Okay.

And you said that there were 360 payment. Right. For the whole 30 years. Exactly.

So if I take $300,000 divided by 360 I get $833.33.

Excuse me...no one is going to lend you $300,000 for free. Aren't you forgetting about interest?

What? Who is that guy? What is that voice? Is that Leo?

Excuse me Roger. Can you move over a bit? Luckily for you folks at home we have a special, special

guest for you today. He's known as the Boss of the Bankers. He gets freaky with the finance.

He ain't never goin' broke. He's Jens Kristen.

My friends call me Jens Kristen but you can call me Banker Jens.

Wow! Banker Jens, welcome. Thank you.

Could you tell our viewers a little about what amortized loan or a mortgage is?

Well, mortgage is a special type of loan.

It's a loan when a borrower and a lender can take advantage of the power of compound interest.

Oh cool. Is there a formula for this?

Oh yes there is!

Oh wow! Oh my God! That is so complicated. I think my head just exploded!

Maybe we should break it down and look at it from two perspectives.

From the Borrower's perspective and the Lender's perspective.

Ok that's a good idea. Luckily for us we have a Borrower and a Lender.

Jay, could you leads us through the Borrower's point of view?

Sure. Oh wow! Ok! Oh you know what? It's not as bad as you think it is. I think we've seen this before.

Do you remember this from last time?

Part of it looks kind of familiar to me.

Right we talked about, there's another case where we take advantage of the power of compound interest.

Remember?

Give me a hint. Give me a hint.

It rhymes with gratuity.

Annuity.

Exactly. That's exactly right.

Why don't we lead our students through the annuity formula.

Ok. So we are looking at the right hand side of the equation.

And then if we think of that as an annuity, I see we have all these different letters.

What does the "n" stand for again?

"n" is number of times it gets compounded or how many payments you make in one year.

So it would be 12. Because you are making a monthly payment.

Ok, and what does the "t" stand for again?

"t' is time in years. We're taking a 30 year loan so it would be 30.

Cool, and "r"?

"r" is interest rate. Like we'll say it's 5%.

And of course when you do the calculation you're going to convert that into decimal. So it'd be 0.05.

Ok. So it's looks to me like there's still two things in our formula that haven't been filled out yet.

What's this "FV" and this "pymt"?

Right. The "pymt" is the payment. That's how much monthly payment you're going to make.

That's like my mortgage? My mortgage payment?

Right, and the feature value is...ummmm I don't know.

Well maybe I can help here.

Oh Jens can you fill us in on what's this feature value and payment should be?

Yes, as a Lender obviously I'm trying to take advantage of you.

But well seriously, I'm trying to take advantage of compound interest.

And if I have $300,000 that I would like to invest, compound for 5% for 30 years.

Then I can make a decision and think well do I just want to invest it or will I lend it to Jay.

Lend it to Jay. Lend it to Jay.

[laughing]

Ok so if I wanted to buy a...

If I wanted to take out a $300,000 loan and I want to take advantage of the power of compounding,

from the Bankers point of view, how much money will they expect at the end of 30 years?

Well, that's when we look at the left side of the formula and this, again, is a formula we know.

It's the compound interest formula you calculated before.

Can you lead us through this compound interest formula? What does the "P" stand for?

"P" is the principal. In this case it's the $300,000 that I would invest or lend to Jay.

What about the "r"?

Well the "r" is the interest rates. We agreed on the 5%.

Oh right we already talked about that. And the "n" was?

The "n" is the number of payments for each month, which means it's going to be the 12 payments.

Oh the number of payments per year? Yes.

Got it. and it's 12. Correct. Cool.

And in our case, what's "t"?

And "t" to the 30 years.

Cool. Awesome. So at the end of, you know, this calculation.

We plug everything into the computer what do we get?

Well if we put it all into this machine we get...

[makes calculator noises]

Oh very nice we get $1,340,323.29

Wow! More than 1 million dollars! I have to pay that much money? I don't have that much money!

That's the power of compounding!

That's so much money! For a $300,000 house I have to pay more than a million dollars?

No of course not. Because we have both taken advantage of the power of compounding!

Ooooh I get it!

So for your point of view that's what you are expecting at the end.

Exactly.

And from your point of view...

I try to match that by investing a certain amount of money every month.

Let's revisit that Annuities Formula again.

Right. So I think now we know what the future value is.

Ok.

Jens thanks for calculating for us. Sure. 1 million 3 hundred long number. About 1.3 million dollars.

About 1.3 million, right.

So now we can plug all the numbers in.

So we know on the left hand side I have about 1.3 million dollars.

On the right hand side I have everything else except the payment.

Ahhhh.

Now we can solve for the payment.

Ok. So let's say we solve for the payment using algebra.

Right. So since you want to solve for payment by itself

You want to divide both sides by the number on the right.

Ok. And what do we get if we plug all of that stuff into our formula?

Right. [making calculating noises]

Oh cool...

$1,610.46.

Ok. That's manageable. That's manageable. It's not that bad.

I see. I see. Cool.

So, Jens why don't you sort of tie this whole discussion of our formula together again?

Can you just breakdown everything we just talked about?

And Banker Jens, Thank you very much.

Oh I'm sorry. Wow.

So if you look back at our formula we can see on the right hand side, which Jay already calculated we have

his perspective as a Borrower.

And on the left hand side you have the perspective as a Lender of the Future Value that I'm trying to make.

Got it.

So we set his annuity side, which is on the right, equal to your compound interest side, which is on the left.

And then it all just works out, huh?

Correct.

Awesome. Awesome. So how much will Jay end up paying in total?

Well, we calculated or you two calculated that Jay will pay $1,610.46 each month.

Now he pays it for 12 months for 30 years. So calculating everything together we get $579,765.60

Wow. That is still a lot of money. It's almost like 2 houses. But way better than 1.3 million dollars.

That's true.

So Jay how much interest did we end up paying?

Well according to Jens...

Banker Jens.

Oh Banker Jens. I paid $579,765.60 I borrowed $300,000.

So basically I look at the difference and I subtract one number from the other and I get $279,765.60

That's how much I paid in interest.

Wow! That's a lot of money. Dude you could buy a house and a Ferrari with that money.

But remember you don't want to over spend so you don't want to spend more than 28% of your Gross Monthly Salary.

So let me ask you Jay, how much is your Gross Monthly Salary?

$6,000

Really? You didn't go to college?

Ok. So we can actually figure it out.

We have 28% of $6,000 and putting into our calculator...

[makes calulator noises]

We get...

$1,680

Well that's your payments $1610.46 is still less, so you're fine Jay.

Then I can borrow your money. Yeah!

And I am going broke!

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SLAM!