financing secrets of a millionaire real estate investor.pdf

34 FINANCING SECRETS OF A MILLIONAIRE REAL ESTATE INVESTOR
afford to pay for a property. It may also affect cash flow, which affects
your decision to hold or sell property.
Loan Amortization
There are many different ways a loan can be structured as far as
interest payments go. The most common ways are simple interest and
amortized.
As discussed in Chapter 1, a simple interest loan is calculated by
multiplying the loan balance by the interest rate. So, for example, a
$100,000 loan at 12 percent interest would be $12,000 per year, or
$1,000 per month. The payments here, of course, represent interestonly,
so the principal amount of the loan does not change.
An amortized loan is slightly more involved. The actual mathematical
formula is beyond a book like this, so we’ve provided a sample
interest rate table in Appendix A. However, you can find a thousand
Internet Web sites that will do the calculations instantly online (try
mine at —click on “calculators”). The amortization
method breaks down payments over a number of years, with the
payment remaining constant each month. However, the interest is calculated
on the remaining balance, so the amount of each monthly payment
that accounts for principal and interest changes. For the most
part, the more payments you make, the more you decrease the amount
of principal owed (the amount of the loan still left to pay). See Figure
4.1.
The loan term or duration is important to figuring your payment.
By custom, most loans are amortized over 30 years or 360 monthly
payments. The second most common loan term is 15 years. The payments
on a 15-year amortization are higher each month, but you pay
the loan off faster and thus pay less interest in the long run.