1. Mortgage basics
Taking out a mortgage loan is often the largest single investment most people will make in their entire lives.
2. Taking out a mortgage
If you want to buy a 500,000 dollar house, you most likely don't have all that cash on hand. Maybe you have saved up 100,000 over a few years, and you have a good income.
What you can do is go to a bank, pay a certain percentage of the home value as a down payment, and take out a loan for the remaining amount. This is called a mortgage loan.
3. Converting from an annual rate
You can derive the rate of return or interest rate for different periods by adjusting by the number of payment periods. You might be tempted to divide the annual rate by the number of periods per year, but this yields a slightly different answer due to the compounding effect.
For example, in order to convert an annual rate of return to a monthly rate, you add 1 to the annual rate and raise this value to the power of 1 divided by the number of payment periods per year. Finally, you subtract 1.
For example, to convert a 12% annual interest rate to the equivalent monthly rate, add 1 to 0.12 before raising the value to the power of 1 divided by 12. Finally, we subtract 1, leaving us with roughly 0.949%.
4. Mortgage loan payments
Mortgage loan payments are normally made on a monthly basis. We can use NumPy's .pmt function to compute the monthly mortgage payment by passing in the mortgage loan monthly interest rate, the length of the mortgage in months, and the total value of the mortgage.
Be extra careful and remember to make everything the same frequency, and not to simply divide the annual rates by 12 when concerting to the equivalent monthly rates.
5. Let's practice!
Now it's your turn.