J Scott Analysis

[Jaago Viitkin]

What am I missing? What is the formula for Equity Accrued?

I am calculating equity accrued in this example

http://www.biggerpockets.com/renewsblog/2010/6/30/...

He gets 3251 dollars!

I get 

2129x12-320000x7% = 3148 dollars paying down my principle on 1st year?

Thank you

[J Scott]

Originally posted by @Jaago Viitkin:

My formula:

mortgage payment that I pay (2129) times 12 months minus 7% of loan amount (320000) = the amount that goes towards paying off the loan and buying me equity.

Am I missing something?

Ah, now I see what you're doing...

Where things went wrong is, in the example, the mortgage is fully amortized over 30 years, not simple interest.  Your calculation of 7% of the loan amount would assume a simple interest payment of 7%, which would fix the interest portion each month.  Instead, because the loan is amortized, the interest you pay decreases each month, while the principal portion increases each month (less interest paid as the principal decreases).

So, in your calculation, you're assuming more interest is paid than would truly be the case.  That means that in your calculation, the second operand ("7% of the loan amount" -- what you expected was the interest paid throughout the year) is actually smaller than what you calculated.  As a result, the difference (the equity accrued) is actually greater than you calculated.

In this case, the interest calculation was off by about $103 -- you pay $103 less than you calculated using simple interest, so that's $103 more that actually went to principal pay-down.

Does that make sense?