Mortgage equity technique? Akerson/ Ellwood formula

[Geovani Castro]

Does anyone use this formula when analyzing a potential investment?

I'm looking at different methods of analysis but I'm having a problem at one part.

Here's an excerpt: The percentage of loan paid off in the holding period (P) can be determined by dividing the amortization rate of the 8-percent, 25-year full-term loan by the amortization rate of the 8-percent, 10-year holding-period loan. The percentage of loan paid off in the holding period is thus equal to 19.24 percent.

What variable/s do I need to look at to determine the percentage of the loan paid off? It would be much appreciated

[Jon Holdman]

You can easily figure it out exactly using the FV function in Excel. Use the PMT functions to figure out the payment amount. For example:

=PMT(0.08/12, 25*12, $100000)

Would give you the payment on a 8%, 25 year, $100,000 loan. This will be a negative number, since your payment is reducing the balance of the loan.

Now, if you want to know the balance 10 years in the future, use:

=fv (0.08/12, 10*12, payment, $100000)

"payment" is from the first calculation.

Now, subtract the remaining balance from the starting balance, $100,000 in my case. That's the amount you've paid off. Divide that by the $100,000 starting balance to get the percentage.

I've read that paragraph several times and have now clue exactly what's being calculated there. I don't know what he means by "amortization rate". I think maybe he's discussing balloon loans. His example has a loan with a 25 year amortization period but a 10 year balloon and he's trying to show you how to figure out how much of the loan is paid off when it balloons. He must have discussed "amortization rate" somewhere earlier. I'm guessing this is some sort of quick and dirty estimating technique that could be performed on a pocket calculator. But what I describe will give you the correct result and can be easily set up in Excel. The parameters you need are the rate, amortization period (25 years in the example) and balloon period (10 years in the example.) If you're just going for the percentage, use some number, like the $100,000 I used. A different loan amount won't change the percentage.