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Great Economic News: Recession is Over!
On 07 Sep 2003 02:24:19 GMT, (Gould 0738) wrote:
Sorry, but it doesn't work quite that way. Loans are amortized by a fairly
complex equation, and your last statement is untrue. When the interest rate
changes for the same principal balance and term, both the interest and
principal
components of the payment will change.
Joe Parsons
Hoo boy. :-(
Where are you coming from with this?
Maybe it has something with having been in the business for a few years. 
You're trying to make a very simple idea unduly complex.
It is *deceptively* simple.
If I borrow $500,000 for any number of years, 500,000 of the dollars shown on
the total of payments line of the disclosure will be used to repay the
principal portion of the loan. Not a few less if the rate is X, vs a few more
if the rate is Y- or vice versa.
It costs 500,000 plus interest to pay back
a 1/2 million dollar loan. The *only* variable that can enter into the "total
of payments" math is the interest cost of the money, (including fees, etc).
Actually, there is at least one more possible variable: the balance at the end
of the term. This is not a trivial point, since few people will hold a 30 year
loan over its term.
We would agree, I'm sure, that a loan for $500,000 from Bank X for a certain
term should have the same monthly payment as
a loan for an identical amount, at an identical rate, for an identical period
of time, from Bank Y.
Given the same balance at the end of n months, yes.
If we compare two $500,000 loans from the same bank, one at 5% and one at 6%,
the 6% loan will have a higher payment than the 5% loan and it is *not* because
the contract calls for any principal amount other than $500k to be paid back.
The difference in monthly payment is generated
exclsuively by the difference in interest rate if the term is identical.
Let me clarify, what I *hope* you have said, just to be sure we're on the same
page: If we compare the two loans in question and the only variable is the
interest rate, then that changing only the interest rate will change the
periodic payment.
Look at an amortization book. There are only four variables that combine to
determine a monthly payment: Principal balance, interest rate, periods at which
the payment is collected and term of contract.
That's one of the problems with amortization books--they don't have the right
number of variables.
When the principal balances are
the same and the term is the same, (and if the periods of scheduled collection
are the same) if there is a difference in payment between two contracts it can
only be because the interest rate is different.
True--assuming that the balance at the end of the term is the same. Please keep
in mind that not all loans amortize to 0. Many loans are amortized over a
specified term, but amortized down to a specified balance. A car lease is an
excellent example of this type of financing.
But what I was responding to was this part of your statement in the post I
followed up: On 07 Sep 2003 01:33:50 GMT, in rec.boats you wrote:
Good question, Doc. It's because your monthly payment includes principal as
well as interest, and the prinicpal portion of the payment doesn't increase,
only the interest.
If you have a loan of $100,000 at 5% amortized over 30 years, your monthly
payment will be $536.82. Increase the rate to 6% and the payment goes to
$599.55. The component parts of each payment break down like this:
At 5%:
Interest $416.67
Principal 120.15
These numbers, of course, apply only to the first payment; as the balance is
retired, the amount of each payment applied to the principal goes up and the
interest component goes down.
At 6%:
Interest $500.00
Principal 99.55
What I understand you to have said when you wrote "the prinicpal portion of the
[monthly] payment doesn't increase, only the interest" was that you believed
that the payment increase would be attributable *only* to the increase in
interest paid with each payment. That is what I was reacting to, since *both*
change with that one interest rate variable.
When I say that amortization is "deceptively" simple, it is because it is very
much a moving target: the proportion of interest to principal changes with each
monthly payment (assuming a level payment). And the relationship between the
two components changes disproportionately with changes in interest rate.
OB BOAT STUFF:
I managed to replace the busted through hull on the houseboat today--and I did
it without dropping either the new part *or* my new glasses into Taylor Slough!
There's no WAY I could go home if I'd lost a THIRD pair to the Delta (don't
ask...)
Joe Parsons
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