KNOW HOW TO AMORTIZE PAYMENTS ON A NOTE
Since the influx of automation, more and more people have no idea how the payments are amortized on a Note. After you complete any Note you should amortize the first payment to see if you did it correctly. You’d be surprised to find lots of mistakes right then before you close a transaction by checking this one thing. You do this on any note you do.
Once you have mastered the amortization of a payment, you can then apply the more complicated payments. Have you had to collect several delinquent payments on a transaction? You need to apply those payments to find out the new principal balance; so you’d need to know how to amortize.
Also, most payments contain PITI (Principal, interest, taxes and insurance). You need to know how to apply those figures to payments and impound amounts. You complete the amortization of each of the delinquent payments, then you go back and take the existing impound balance and add the number of impound deposits that would be made when you send in the delinquent payments. So, let’s say there are 3 loan payments due. You take only the principal and interest amount and complete your amortization, arriving at the current loan balance. Then you take the existing impound balance and add to it the three impound portion of the three payments. Keep in mind that shortages in the impound account also get charged to the seller and in turn, get added to the impound balance prior to arriving at the final amount in the impound account. It is that balance that the purchaser buys at the closing as a charge to the buyer and credit to the seller.
You can see that this could get quite complicated but it all starts with your basic amortization of the payment. If you do not know how to amortize a payment by hand, you must learn the formula for amortizing.
Let’s take a Note with the balance of $100,000, monthly payments at $1,000 per month, at 8%.
Principal Balance x the interest rate per annum = the interest for the year.
$1000,000 x 8% = $8000
Interest for the year / 12 (months) = the interest for that month.
$8000 / 12 = $666.67
P & I payments – the interest for that month = the principal reduction for that payment.
$1,000 – $666.67 = $333.33
Principal Balance on the Note prior to this payment – the amount of the principal reduction = the new principal balance.
$100,000.00 – $333.33 = $99,666.67
Now you know how to amortized a payment on a Note by hand.