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.

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.

Joe Parsons

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?

You're trying to make a very simple idea unduly complex.

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).

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.

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.

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. 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.

I can show you a loan, Chuck, that would have your head spinning. The one I
have for my dental practice is a ten year note. The only way they would
lend me 100% right out of school with no co-signer was with very unfavorable
loan terms. My payoff in the first 3 years was the fully amortized amount
of the loan! In years 4 through 7, my payoff is the "net present value
discounted by prime". Essentially, what this means is that my interest
"penalty" (althought they won't call it that) is higher when prime is lower.
If prime was around 8%, my penalty would be about 5% of the outstanding
simple interest payoff. With prime around 4%, my "penalty" is about 20% of
the simple interest payoff. In years 7-10, the loan reverts back to a
simple interest payoff...so I'm essentially stuck in the loan for 3 more
years, since I've paid 4 years already.

When I signed the note, they showed me a simulated payoff amortization
schedule...but they estimated prime at 8.5%. In retrospect, this was
deceitful as hell. With prime currently at 4%, my payoff now is almost
20%higher than I believed it would be. I still have the original simulated
payoff amortization schedule on their letterhead, and I'm researching my
options to legally get out of this loan. I doubt I really have any,
however.

Essentially, it's the dental loan equivalent of a rule of 78's auto
loan...but much worse since prime is at an all-time low.





"Gould 0738" wrote in message
...
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?

You're trying to make a very simple idea unduly complex.

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).

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.

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.

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. 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.

I can show you a loan, Chuck, that would have your head spinning. The one I
have for my dental practice is a ten year note. The only way they would
lend me 100% right out of school with no co-signer was with very unfavorable
loan terms. My payoff in the first 3 years was the fully amortized amount
of the loan! In years 4 through 7, my payoff is the "net present value
discounted by prime". Essentially, what this means is that my interest
"penalty" (althought they won't call it that) is higher when prime is lower.
If prime was around 8%, my penalty would be about 5% of the outstanding
simple interest payoff. With prime around 4%, my "penalty" is about 20% of
the simple interest payoff. In years 7-10, the loan reverts back to a
simple interest payoff...so I'm essentially stuck in the loan for 3 more
years, since I've paid 4 years already.

When I signed the note, they showed me a simulated payoff amortization
schedule...but they estimated prime at 8.5%. In retrospect, this was
deceitful as hell. With prime currently at 4%, my payoff now is almost
20%higher than I believed it would be. I still have the original simulated
payoff amortization schedule on their letterhead, and I'm researching my
options to legally get out of this loan. I doubt I really have any,
however.

Essentially, it's the dental loan equivalent of a rule of 78's auto
loan...but much worse since prime is at an all-time low.


No doubt, but such a loan does not reflect the type of terms incorporated into
residential home mortgages. Our discussion was, I believe about how rising
interest rates could affect the affordability of housing and dampen the current
market.







"Gould 0738" wrote in message
...
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?

You're trying to make a very simple idea unduly complex.

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).

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.

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.

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. 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.

"Gould 0738" wrote in message
...
Our discussion was, I believe about how rising
interest rates could affect the affordability of housing and dampen the
current
market.

I'll agree there. We could be facing a flooded housing market (and a lot of
defaults) in 3-5 years when all of the 4 to 4 1/2% ARM's come due. Imagine
someone who bought the biggest house they could afford at a 4% 3-year ARM
with high rate caps? Will they be able to afford that house if rates hit
8%? On a $400k mortgage, that's another $1000 per month on the same house!

On Sun, 07 Sep 2003 03:10:18 GMT, "NOYB" wrote:

"Gould 0738" wrote in message
...
Our discussion was, I believe about how rising
interest rates could affect the affordability of housing and dampen the
current
market.

I'll agree there. We could be facing a flooded housing market (and a lot of
defaults) in 3-5 years when all of the 4 to 4 1/2% ARM's come due. Imagine
someone who bought the biggest house they could afford at a 4% 3-year ARM
with high rate caps? Will they be able to afford that house if rates hit
8%? On a $400k mortgage, that's another $1000 per month on the same house!

A couple of bits of information: first, when ARMs are underwritten, they are
typically underwritten with the "indexed rate" in mind; some ARMs (but not so
much any more) have jaw-droppingly low "teaser" rates, and those initial rates
are below the value of the index (typically the LIBOR index or 1 year Treasury,
among others) plus the margin. When the underwriter crunches the numbers on a
loan, she'll use the "actual" rate (what it would be if it were adjusting today)
as the qualifying rate, irrespective of the start rate.

Second: All ARMs have certain limitations on how they can adjust. For
intermediate term adjustables (3 or 5 year, for example), the initial "cap" is
typically 2% over the start rate for the initial adjustment, with subsequent
annual limitations of 2% (up or down) and lifetime limitations of 5% to 6% over
the start rate. I have never seen an adjustable rate mortgage hit its life
cap--even in the 70s, when rates were, well, ridiculous.

Someone who got a 5 year ARM at 6% based on the LIBOR index five years ago is
adjusting now to 4%--and they'd be going to 3.7% were it not for the 2% "floor."

Assuming the borrower in your example was a typical creditworthy borrower (as
most are), the worst case would be that the rate on their 4% 3 year ARM could go
to 6%--and that's not too far off what the underwriter would have qualified them
for in the first place. In order for their ARM to hit 8%, the index (the LIBOR,
for example) would have to move very quickly to nearly 6%--and that's territory
that hasn't been visited for a number of years.

Joe Parsons

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

"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.

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