ITAO Example #2
Let's try to solve another ITAO problem:
Vm or Mortgage = $80,000
Ym or Interest Rate = 12%
n or Term = 30 year payment term (amortization)
b or balloon payment due date = 20 years
CRRT = Contract rate for the remaining term of the loan
ADS = Vm x CRRT x 12
To figure out the ADS, annual debt service, we find that the Rm in the ITAO tables for a 12% interest rate loan, with a 30 year amortization term, is 0.123432.
$80,000 x 0.123432 = $9,874.56
Another way to find the ADS, is to take the figure under the ITAO column, which is the monthly loan payment figure, and multiply it by 12. The result will give you one full year's loan payment amount.
$80,000 x 0.010286 = $822.88
$822.88 x 12 = $9,874.56
Now we'll figure out the remaining loan balance when the balloon payment is due after 20 years of loan payments. We can do this two ways, using either the ITAO column figure or the Rm column figure. (There is another way of doing this: by dividing the original ITAO figure by the new ITAO figure, or by dividing the yearly Rm figure by the new Rm figure to get the same result. This was covered in the prior section.)
First we find that the ITAO figure for a 12% interest loan at the 10 year term is 0.014347. Since we are using the monthly ITAO then we must use the monthly loan payment to figure out the balloon payment.
$822.88/0.014347 = $57,355.54
Or we can find that the Rm figure for a 12% interest loan at the 10 year term is 0.172164. Since we are using the yearly Rm then we must use the yearly loan payment to determine the balloon payment.
$9,874.56/0.172164 = $57,355.54
Using both methods we come up with the same answer. The balloon payment due after 20 years of loan payments in our example will be $57,355.54.