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