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Great Economic News: Recession is Over!
On 07 Sep 2003 05:24:10 GMT, (Gould 0738) wrote:
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.
Accounting for amortizaton is not deceptive at all, unless a payment includes
escrow or reserve fees, choke and croak insurance, or etc. Pure P&I is simple.
For a monthly period:
1. APR divided by 12.
I suspect that you have an incorrect understanding of the term, "APR."
2. factor from step 1 multiplied against outstanding principal balance
3. result of step two recorded as "interest income"
4. balance of payment received, after removal of interest income, deducted from
outstanding principal balance.
Throwing in balloon payments, etc, does kink the whole system. My assertions in
this thread apply to loans that amortize to $0 at the end of a scheduled
contract period.
Again: what I was reacting and responding to was your statement that "your
monthly payment includes principal as well as interest, and the principal
portion of the payment doesn't increase, only the interest." That statement, as
written, is incorrect, as I tried to show.
And when I say that amortization is "deceptively simple" I mean that the
relationships between principal and interest payments and comparisons of loans
at different interest rates is not at all linear. When comparing two loans,
it's not as simple as saying, "7% is 40% more expensive than 5%"--because it's
not.
Joe Parsons
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