On Sun, 07 Sep 2003 02:24:52 GMT, "NOYB" wrote:
"Joe Parsons" wrote in message
.. .
On 07 Sep 2003 01:33:50 GMT, (Gould 0738) wrote:
Just when it seems that you do indeed *have* a brain, you post something
like this. If a mortgage rate goes up from 5% to 6%, the monthly
payment on
a 30 year mortgage goes up by a little under 12%...not 20%.
Sorry, but I'm not the one who needs to see the Wizard about a brain.
When
money costs 6%, it *is* 120% as expensive as when it costs 5%.
"So, why doesn't the payment go up by 20?" inquires NOYB.
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.
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.
But the interest amount in each payment changes exactly the same as the
percent change in the rate on a 30 year mortgage. If the rate jumps from 5%
to 7% (a 40% increase), the amount of interest paid in each payment also
increases by 40%...even though the total payment increases by a much smaller
amount. That means Gould was right and I was right.
Let's use your example of a $500,000 loan at 5% and at 7%.
A $500,000 principal at 5% will amortize to 0 in 30 years with a monthly payment
of $2,684.11. This payment includes $2,083.33 interest and $600.78
principal--but ONLY for the first payment.
The same principal balance at 7% will amortize to 0 in 30 years with a monthly
payment of $3,326.51. This payment includes $2,916 interest and $409.84
principal--for the first payment.
(The payment increase from 5% to 7%, by the way, is a tad under 24%...just
thought I'd mention that.
)
Now, fast forward five years. The balance for the 5% loan will be $459,143.
That $2,684.11 payment will include interest of $1,913 and principal of
$771--but ONLY for the first payment of year five.
Compare that with the 7% loan: the balance will be $470,657. The monthly
payment of $3,326.51 will include $2,745 in interest and $171 in principle--but
only for the first payment of year five.
See what I mean when I say it's not quite as simple as it appears? It's a
moving target. And I've always found absolute words like "exactly" or "always"
to be dangerous.
Don't get me started on the tax aspects...
Joe Parsons