Carmon

There are dozens, maybe even hundreds, of online financial calculators that you can use to figure out the amount of a monthly loan payment on a mortgage or a car loan.

What can you do to figure out a monthly loan payment amount if there is no computer or internet handy? And you have finally lost or tossed out that old HP12c you had in your top drawer since 1982.

The formula is simple but unless you can do logarithms in your head you need a calculator with a power function. That's the key with y^x (superscript x) on it. For example 2 raised to the 3 power = 8, or 2 x 2 x 2 = 8. On the calculator you would enter 2 then y^x then 3 then = to get the answer 8. If you have kids in school you probably have a calculator with a power function lying around the house. Some cell phone calculators will do the trick also.

A compound interest payment calculation is not rocket science but it is not trivial math either. Hence the need for the power function key. If you do the calculation half a dozen times you can probably commit it to memory. Worst case is the formula will fit on a small index card that you can slip into your wallet or purse.

You are watching the Sunday afternoon game and you see an ad from a local mortgage finance company offering 6% mortgage financing. You got your current $50,000 second mortgage 5 years ago at 8%. It is a 20 year loan. Is it worth checking out the mortgage finance company's offer to refinance the remaining balance of your 2nd mortgage for the remaining 15 years at a lower monthly payment? Let's do the math without leaving the couch.

The variables are:

N = loan period in months. i.e. 15 years = 180 months.

I = interest rate in whole numbers. i.e. 6% written as 6.

P = principal amount of the loan. The amount borrowed.

Q = the Q factor. An intermediate calculation.

M = monthly payment amount

Here's the entire formula for the monthly payment amount of a compound interest loan:

M = (P * I * Q) / (1200 * (Q -1))

Easy enough, but first you have to calculate the value of Q. Here is the formula:

Q = (1 + R/1200) ^N. Pretty simple, but you do need the power function key. N can get fairly large.

Your current monthly P + I payment on your second mortgage is $418.22. The pay-off on the remaining balance of the loan at the end of the 60th month is $43,763 (rounded)

The mortgage finance company is offering 6% on $43,763 for 15 years. What is the monthly payment amount?

Q = (1 + 6/1200) ^180 = 2.454

M = (43763 * 6 * 2.454) / (1200 * (2.454 -1)) = $369.31 (rounded).

In this example by refinancing your second mortgage at the lower rate you would pay off your current second mortgage at the same time and have almost $49 more cash per month in your pocket. Let's see. If you invested that $49 per month at a 20% annual return...

(c) 2006 Peter Boston is an attorney, writer, and the editor of the profacere.com website, a tips and resource site to refinance a second mortgage, get no fax payday loans, or improve your FICO credit score, updated daily on the profacere.com credit blog.