 Personal finance practice problem using OneNote. Estimated monthly cost for the purchase of a condominium. Get ready to get financially fit by practicing personal finance. You're not required to, but if you have access to, OneNote would like to follow along with the icon on the left-hand side. Practice Problems tab in the 7040 Estimated Monthly Cost Purchase Condominium tab. Also, take a look at the Immersive Reader Tool. Personal or practice problems are typically in the text area too with the same name, same number, but with transcripts, transcripts that can be translated into multiple languages and either listened to or read in them. We have the information on the left-hand side. We're going to be using that to calculate our monthly costs, which we might want to do for our budgeting purposes. The major cost being typically related to the financing, the mortgage. So that will be the primary cost and then we'll also want to consider the property taxes, property insurance if applicable, and the association fees if applicable. And then we'll also do our calculation for our loan amortization, something we will practice doing often when we work through these practice problems. We will do more comprehensive problems later on in this section and we'll practice breaking out our loan amortization table into a year-by-year component. I want to emphasize that you can find tools online to do this type of calculation. I'm not advertising this particular tool. You can find a bunch of different tools on there to help you to construct what you think the loan payments will be and build amortization tables. But I highly recommend getting to do these in Excel if you're going to do a lot of these projections. So if you have a large purchase and you're thinking about different options, you can tie together a lot more efficiently things in Excel than you can online and you can run projections much more easily. So we do work these problems in Excel and I'll try to kind of make that point as we see it here in our practice problem in OneNote and then if you want to expand on that and dive into it in Excel, you can. So we have on the left-hand side, we've got the mortgages, the $250,000, the years, we're going to say the 25 years, the rate is going to be the 8%, the property tax per year we're going to say is $2,200, the property insurance per year $600, the association fee per month we're saying is the $300. So what are going to be the monthly payments? So the first thing that will come to mind, we'll put together our little table over here to do these calculations. First thing that comes to mind will typically be the monthly mortgage payments that we'll try to calculate and we could do that with a formula. If we have this information, we can populate and use the formula. This item, if you're thinking about a purchasing situation, are often where you're going to be doing different projections and adjustments focusing in on this big component, the financing here. So we'll do this calculation. We'll see it more and more as we go through practice problems in future presentations. If you have the mortgage amount, the years, in this case, we're taking the 25 years instead of like the standard 30 year, we've got the rate at the 8%, clearly the rate will be dependent upon the current economic conditions as well as your economic conditions and the financial institutions that you're dealing with. If you go into more unusual loans, then of course the rates can fluctuate more. Unusual loans being loans that aren't like fixed 30 year loans, for example, but we have that adjustable rate kind of situation we'll talk about briefly here. If you want to dive into that more depth, we do have a course where we do just, you know, diving into more complex kind of loans on that. So in any case, we're going to say this is going to be equal to the payment calculation to get to this number up top. You'll see this in Excel, but we'll go over the calculation quickly here. You've got the rate. The rate is going to be that 8%. So note whenever we're talking about the rate for a loan, we're talking about a yearly rate. And when we're talking about most loan repayments, we're going to be repaying on a monthly basis. So we've got to break it down to a monthly basis dividing it by 12. The reason we don't talk in monthly rates or in daily rates or in weekly rates, even though we might use them as you can see here a monthly rate in our calculation is because the yearly rate is in a reasonable area. We can talk about 8% as opposed to 812 of a, you know, of a percent, right? Because you're talking about small numbers in that case. So we got to get, we got to make sure that the rate ties down to the periods that are going to be involved here, which will be months. And then comma, the number of periods is what this stands for. That's going to be picking up the 25 in this case. That's in years. And of course, we want it in months. So we don't, we don't call it, you know, we don't name out the number of months. Typically we typically say years, but it's going to be paid on a monthly basis. Therefore, we'll take that and multiply it times 12. And then comma, the present value, that's going to be the mortgage amount of the 250,000. So that gives you that quick kind of calculation up top. You can do that with, with financial calculators as well. So if I plug this into a financial calculator online, 250,000. And we're going to say, okay, there's 250, it was a 25 term and the rate was 8%. And let's run it. And so you get a quick calculation of the 1, 9, 2, 9, 54. Is that what we had here? So 1, 9, hold on a second. Yeah, that's right. It's rounded. And then we'll take a, then we can construct the amortization table from this. I can open this up and build out the amortization table. Now the thing that you can't do as easily online is, is basically you could make the adjustments to your data up here, but you can't really tie anything to this amortization table. In other words, the next thing I would like to see is the interest per year, perhaps, and the equity per year, perhaps, so that I can think about my tax consequences as well as possibly the equity in my home. The difference, in other words, between the value of the home and the loan price from year to year, that might have a couple of things that would be involved. One would be how much is the actual principal that I'm paying down on the loan, not the interest portion, that will increase the difference between the value of the home and the loan in the home. And then whether or not the home goes up in value, hopefully it goes up in value, are going to be the factors that are going to have an implication on that equity calculation. So let's go into the property taxes. So we got the property taxes. We got the property taxes per year, we said, of the $2,200. You might pay property taxes, for example, twice a year or something like that. So you might have the yearly taxes. You might want to break the taxes down to a monthly basis. Notice that when you're talking about cash flow systems, you might only pay the property taxes twice a year, for example, from a cash flow, or you might have it going through your mortgage company or something like that. So you pay it as part of your monthly payment, possibly, in that situation. But from an accrual standpoint, we want to break it down to a monthly basis to think about what our average monthly payments will be, which, again, could differ slightly from your cash flow basis if you pay your property taxes on a, you know, every six month basis. So $2,200 divided by 12, we're paying then about that $183. $183.33. It's rounded here. We got rounded numbers. Property insurance per month is going to be the $600 per year, we said, for the property insurance. So we're simply going to do the same thing and take that divided by 12. Again, you might pay the property insurance only once a year or something like that. But if you're thinking about the cost on a per month basis, it would be 600 divided by 12 or 50. So you want to think about the two things we've got to look at. What are they going to be, basically, the cost on a month-by-month basis, which is kind of an accrual concept, and then possibly your cash flow basis, making sure that you've got the cash flow to pay the things when they come do, the property taxes possibly twice a year, maybe instead of monthly and possibly the insurance happening on a yearly basis, maybe. And then the association fees per month. So remember when you're talking about a condominium that you're also going to have those association fees, because you've got the communal property that you still have to deal with. And those can be significant and they could change from place to place because you're voting on the communal property and whatnot. So hopefully everyone gets along and you can get the communal property. It's going to be something, so you want to take it into consideration. So there it is, and so we're going to say, all right, well, that would give us the total of the 1930 for the actual, the loan, the 183 for the property taxes, and the 50 for the property insurance with the association fees of the 300, getting us the 2463. So then I'm just going to get into the practice of basically doing the amortization schedule, and we'll do these more and more and get into more in-depth problems later. It looks intimidating to do it here, but once you build it a couple times in Excel, it's fairly easy to do. And I'll try to give an argument as to why you might want to do it. But just a quick recap and you got to get the headers up top. And then we've got the 250,000. That's that time period zero, which is, I'm going to say month by month, month zero. And then we could just calculate. We got the 250. We got the 250,000 times 8% was the rate, I believe. And that would be the 20,000 per year. We got to take that and divide it by 12 to get the amount of interest, which is about this number here, about 1667. It's rounded. So that would be the calculation. Notice you can also do it this way. You can say, well, what if I took the rate of 8% 0.08 divided by 12? That would give us our monthly rate, which is quite small 0.6%, 0.66% or 0.67% about. So that's why we don't really talk in monthly rates, but I could take that monthly rate times the 250,000 and you get the same calculation here. So if I'm making a payment of 1930, if I take the 1930 minus the amount that's rent in essence, that's not paying down the principal rent on the money, the interest 1667 about, we get about 263, so that means that the 250,000 loan of the 1,930 that we're paying is only going down by the 263 to get to the 249,733. If I go to year two, then it changes, right? The payment stays the same, but the cost of that staying the same is the amount allocated to interest and principal will differ. It's a small difference up top because it's a long loan, but that difference becomes significant over time, and the fact that that difference is significant means that there's a substantial difference between the interest and the principal, and the interest could be important for tax calculations. So you might want to know the interest on a yearly basis, which we'll talk about shortly, and the loan decrease could be valuable when you're trying to think about your equity in the home, which is useful when you're trying to think about, where do I stand if I was trying to sell the home at some future point? If I expect to sell it in five years or something like that, where will my equity be? What will my cash flow be at that point in time? So the second one, I'd have to take the new balance, which is 249,737 times the 0.08. That would be the yearly interest divided by 12. That would be the monthly interest, 1665. If I then take the amount that we pay, 1930 per period, minus 1665. We've got the decrease in the loan balance or loan principal decrease. And so if we had the loan at the 249,737 after the first payment minus of this 1,930, only 265 is non-rent, non-interest on the purchasing power. So that means the loans only going down to the 249,472. So if I see this, you could see then the payments are the same and the difference in the principal and interest is being broken out here, which starts to become substantial. And if I scroll all the way down to the 25 years, which is going to be all the way down here, you could see the difference between the interest and principal here is going to be significantly reversed. And that's going to have a big implication again on the equity differences or changes in the equity and the changes in the amount of interest which has a tax implication. So this information you can basically pull from something like an online type of format. So the online format, you could see they basically built this schedule for us. You could double check our numbers. I could look at it and say, okay, does that tie out here like the principal portion for the second year was 264 or 265 about. So if I go back on over, it's about 265. That looks good, but you might then want to go to the next step and say, I would like to break this information out on a year by year basis. I want to know how much interest I'm paying on a year by year basis. So then I can then do a tax calculation and try to estimate my tax benefits related to the interest possibly. And I also want to know where I stand in terms of an equity situation on a year by year basis, which is a little bit that's one step over a little bit more difficult to get over from this data over here. And also, if I want to tie anything out to my tables using formulas, then it's easier to use Excel. So for example, I can use formulas and we'll do this in Excel if you want to get into it in more detail to say, okay, well, if I take a look at year one, if I was to add up everything in year one with regards to the payments, payments are easy because I can take the one nine three zero times 12. Those basically stay the same. It's a rounded. So it's a bit different. But the interest changes. So I'd have to actually add up the interest. I'd have to go 1667 plus 1665 plus 1663 plus 1661 plus 1660 down here on the interest to get this number over here. That's tedious to do. And I want to get the yearly number so that I can I can calculate my tax benefit and that tax benefit. That number is going to change from from period to period. In other words, if I pull this down, so now the interest is fairly different. If I if I change it all the way down to the bottom, the interest is getting much different from year to year, which could have a significant difference on the tax implications. I also think about the loan balance from from year to year, because you know that could help me to determine, you know what you know what's going to be the impact on the equity balance, the loan balance decrease is going to be the, you know, hoping to see the difference hopefully and the value of the home, which hopefully will either remain the same or hopefully go up and and the loan that we have outstanding. So these two numbers could be significant on basically a year by year basis for whatever calculations that we're making. And we can construct this year by year basis fairly easy using Excel and we can do it either with a formula basis using a sum. These can be used a sum if it is going to be used be doing a minimum balance. So this number right here is the end after the first year that 246 727. That's that's where we stand at the end of one year, which would be nice if we had on a year by year breakout for the 25 years. We could do that with formulas. We could also use a pivot table to break that out fairly easily. And that could be useful information that you can't get quite as easily on this online tool. So I would use the online tools here to verify your amortization tables, then use your amortization tables to make the year by year tables possibly, which you can then build into more complex calculations if you're then taking a look at your tax implications and other kind of things like if you're going to sell the home, what's your equity after so many years and so on and so forth, which will tie into a little bit more in future presentations.