This is one of those topics that a lot real estate buyers are clueless about. Many of them just don’t know how the monthly amortization is determined. This is true for both the first time as well as the seasoned home buyers — and a few real estate agents I’ve met. They simply let the bank, or any lending institution for that matter, handle the computation for them.
Take this particular question shown below which is commonly encountered by real estate sales people.
“How much is the monthly payment for this house which is priced at P1.2M?”
First, any attempt to give a figurative amount to answer that question is meaningless. For one, the question itself is already wrong.
Home Loan Computation: The Amortization Formula
The monthly amortization — or the monthly payment, if you will — is a figure that is dependent on three factors:
- Loan Amount. The actual amount borrowed, usually the selling price less the down payment.
- Interest rate. This figure is usually expressed as per annum value, likewise known as annualized interest rate. If you are familiar with bank financing, you have probably noticed that the interest rate is different for each bank. In the case of Pag-IBIG Housing Loan, the interest rate is dependent on the loan amount.
- Loan term. This tells how long the loan is going to be fully paid; also normally expressed in terms of the number of years. In Pag-IBIG Home Financing, the loan term is usually 15 years or 30 years, though, you may also opt for a shorter loan term.
To determine the monthly amortization, we can simply use this equation:
Essentially, this amortization formula says that
- Given a fixed interest rate and loan term, your monthly amortization is directly proportional to the amount of loan. The bigger the loan amount, the bigger the monthly amortization due.
- Given a fixed interest rate and a particular loan amount, the monthly amortization is inversely proportional to the payment period. The shorter the payment period, the larger the amortization; the longer the payment period, the smaller the monthly payment due.
In other words, while you may be paying a higher monthly amount for a 15-year mortgage compared to a 30-year mortgage, the primary advantage to you is that the loan if fully paid in a shorter period of time.
The main advantage of using the formula above is that it is very handy and versatile. Anyone can use it given any amount of loan, loan term and interest rate.
However, a lot of people are simply lost with Mathematical equations. And not amount of explanations will ever want them to use any formula to determine any figure.
Luckily for them, there is also another way of determining the monthly amortization and that is by using an Mortgage Factors Table such as the one shown below.
The Pag-IBIG Mortgage Factors Table
Take note that this table is made especially for The Pag-IBIG Housing Loan with interest rates effective at the time of this writing (April 2011). You can use it for loan terms starting from 1 year to a maximum of 30 years loan term.
The annual interest rate shown is only the following: 6%, 7%, 8.5%, 9.5%, 10.5% and 11.5%. For interest rates other than these, the table is not applicable anymore. It’s best to use a Mortgage Calculator – a tool which will become available on this website soon.
Given the table above, it is now very easy to determine the monthly amortization by simply following this understandable formula:
Monthly Amortization = (Loanable Amount) x (Factor Rate)
Consider this hypothetical case: You are buying a Pag-IBIG Home worth P 1.2M and you are planning to put a down payment of P 240,000 which is 20% of the selling price. How much then would be the monthly amortization if you are to pay it is 15 years? How about if the loan is to be paid in 30 years?
Please be guided by the formula above and the interest rates of Pag-IBIG Housing Loan shown below.
From the case in point and looking at the Factor Rates shown at the Table, we can gather the following:
Loan Amount: 960,000 (this is Price 1,200,000 less Down Payment of 240,000 )
For 15-Year Mortgage, the Factor Rate = 0.00984740.
For a 30-year mortgage, the factor rate = 0.00768913
When using this formula, take note we are not putting into consideration some other trivial payments like fire insurance, mortgage redemption insurance, membership dues and others. We are leaving that for the sake of simplifying the illustration.
Update: A more detailed article about the Amortization and Mortgage Calculator has been made on this website. Please check it now.
“Pag-IBIG Housing Loan Amortization Demystified” is written by Carlos Velasco.