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## How Much Do They Owe Now?

Note: You can use any financial calculator to do this problem, but if you want the BEST, you can get our 10bii Financial Calculator for iOS, Android, Mac, and Windows!
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THE SCENARIO A friend contacted me this week for help figuring out a note he's considering buying. The note's details: 30-year fully amortizing loan, \$85,000 borrowed, 9.75% interest rate. The borrower paid for 4 years, then stopped paying for 8 years. The question: If the amount owed increases during the non-payment period with compounding 9.5% interest and accrues no late fees or other non-interest charges, how much does the borrower owe at the end of the total 12-year period?
THE SOLUTION This is a multi-step problem.
1. Figure out the payment on the loan.
2. Figure out how much the borrower owed after making payments for 4 years.
3. Figure out how much the borrower owes after not making payments for 8 following years.
First things first, make sure the calculator is using 12 Payments per Year. Step 1: Figure out the payment N: 360 (The loan is a 30-year loan) I/YR: 9.75 (The loan's interest rate is 9.75%) PV: 85,000 (The borrower borrowed \$85,000) PMT: (This is what I'm trying to find) FV: 0 (The loan amortizes fully)

The loan payment is \$730.28 per month.

Step 2: Figure out the amount owed after paying for 4 years N: 48 (The borrower paid for 4 years, which is 4 x 12 = 48 months) I/YR: 9.75 (The loan's interest rate is 9.75%) PV: 85,000 (The borrower borrowed \$85,000) PMT: -730.28 (The loan payment is \$730.28) FV: (This is what I'm trying to find)

The unpaid balance after 4 years of making payments was \$82,683.39.

Note that if you used the calculated value from step 1, your answer will be slightly different due to the effect of fractional pennies. Your calculator may only display 2 decimal places (-730.28) but the real number behind the scenes is more like -730.28125. When the person sends in their payment, they are only sending 730.28 which means the 0.00125 is still left over and it changes the math slightly over the course of time. Since we can't actually pay fractional pennies, it's more correct to type in the whole-pennies amount when doing subsequent calculations. Step 3: Figure out the amount owed after not making payments for 8 years N: 96 (The borrower didn't make payments for 8 years, which is 8 x 12 = 96 months) I/YR: 9.75 (The loan's interest rate is 9.75%) PV: 82,683.39 (When they stopped paying, the borrower still owed \$82,683.39) PMT: 0 (The borrower has not been making any payments) FV: (This is what I'm trying to find)

After not paying for 8 years, the unpaid balance on the loan has grown to \$179,803.94.

Unless the property securing the loan has experienced some serious appreciation during the last 12 years, it's not likely that it's worth as much as the unpaid balance today. If it's not, then my friend will need to get a sufficiently large discount on the purchase of the note to make sure that his investment is adequately protected by the value of the collateral.

What do you think? Should my friend consider this note further? Or should he throw this one back and look for a different note? Why? Let us know in the comments!