How to Calculate the Amortization for a Loan on a Seller Carry Back Loan

How to Calculate the Amortization for a Loan on a Seller Carry Back Loan
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Seller carry-back financing occurs when the person selling a home holds a second mortgage from the buyer to cover the cost above what is financed by a regular first mortgage. For a simple example, the buyer obtains a mortgage for 80 percent of the home price, and the seller carries a second mortgage for the remaining 20 percent. The monthly payment for the carry-back loan depends on the agreed amount, term and interest rate. With the payment and rate, you can manually calculate an amortization schedule or set up a simple spreadsheet to calculate the entire schedule.

Calculate the monthly loan payment, if you do not have that information, using an online loan payments calculator. Enter the loan amount, the term of the loan, and the annual interest rate into the provided fields for each, and click the "Calculate" button, or equivalent. For example, entering a $20,000 loan with a 10-year term at 8 percent will return a monthly payment of $242.66.

Calculate the monthly interest rate for the loan by dividing the annual rate by 12. In the example, 8 percent per year gives a monthly rate of 0.667 percent.

Multiply the monthly interest rate times the outstanding loan balance to get the interest charge on the next monthly payment. On the example carry-back loan, for the first payment the interest amount will be $20,000 time 0.667 percent, equaling $133.33.

Subtract the interest amount for the first payment from the monthly payment amount to get the principal portion of the first payment, and subtract that result from the loan balance to get the next loan balance for the amortization table. With the first $242.66 payment of the example loan, the principal will be $109.33 after subtracting the $133.33 of interest. Subtract the payment principal to leave a loan balance after the first payment of $19,890.67.

Repeat the interest and principal calculation for each payment based on the loan balance after the previous payment. With each payment the interest amount will drop slightly and the principal reduction will get a little larger. On the example loan, the second payment's interest, principal and balance numbers would be $132.60, $110.06 and $19,780.61. With the last payment the loan balance will be zero.

Tips

  • There are many free online loan payment calculators, and many allow you to enter the term of the loan in either years or months. If you're familiar with algebraic functions, the loan payment formula can also be done using a financial calculator, or financial functions in a spreadsheet, but many loan payment calculators are freely available online that will calculate it instantly. Any extra principal payment amounts go directly to the loan balance, and the breakdown for all following payments would have to be recalculated. Extra principal does not change the payment but will shorten the time it takes to pay off the loan.

Warnings

  • The 2010 Dodd-Frank Wall Street Reform and Consumer Protections Act requires that any residential loan including seller carry-back loans be set up to fully amortize over the term of the loan. This means that a carry-back loan cannot be interest-only or have a balloon payment.