What is the annuity method?
To buy a house most people will need to get a loan or mortgage at a bank. One type of loan is the annuity mortgage which in some countries can be used for interest tax refund. If you want to buy a house you will need to know how much it will cost per month and during contract term. How do you calculate yourself how much the annuity mortgage costs and what aspects do you have to consider with that?
If you want to get a mortgage profiting of tax refund (if in your country applicable) you will need to have a mortgage based on the annuity method. But what is that, the annuity and how you can calculate it easily? With the annuity the monthly costs are calculated based on a mortgage debt and a certain interest rate. What you pay per month doesn't change but the ratio between costs for interest and payoff change with time. At first you pay a lot of interest and a small part payoff, but this ratio changes. In time payoff grows and interest drops. How do you calculate this?
n = number of months you will need to pay off your mortgage. Normally this is 30 years and that is 360 months.
Based on previous formula you van quickly determine how much costs you per month have when closing a certain mortgage.
Costs per month = 146,500 * 0.003975 / (1 – 1.003975-360) = 765.98 dollar.
Of course this amount is composed out of interest with payoff. This means also you cannot deduct this amount from tax, so what is the interest part you can deduct?
Your debt in the second month will be 146,500 – 183.64 = 146,316.36 dollar.
Payoff 2-nd month = 765.98 – 581.61 = 184.37 dollar.
Total interest costs = 275,745.60 – 146,500 = 129,245.60 dollar.