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From: ark@alice.UUCP (Andrew Koenig)
Newsgroups: net.consumers
Subject: Re: Mortgage Question
Message-ID: <3599@alice.UUCP>
Date: Fri, 19-Apr-85 18:07:40 EST
Article-I.D.: alice.3599
Posted: Fri Apr 19 18:07:40 1985
Date-Received: Sat, 20-Apr-85 07:09:26 EST
References: <586@homxb.UUCP>
Organization: Bell Labs, Murray Hill
Lines: 74

>> Ummm...something's wrong here.
>> 
>> If you take out a 30-year mortgage and make exactly the same payments
>> on it as you would on a 15-year mortgage at the same interest rate,
>> your total cost will be exactly the same for both loans.


> Ummm...something's wrong THERE

> If you take out a 30-year mortgage, your interest is
> calculated based on a 30-year repayment schedule.  If
> you want to make an additional principal payment that
> month, fine.  But you still owe the (30-year) interest--
> the principal is not reduced instantaneously.  The amount
> of that "extra" interest does diminish monthly, however.


> 			Scott J. Berry

Not true, at least in New Jersey.  All mortgage loans here
(and, I think, all mortgage loans anywhere that are obtained
through FNMA or GNMA) are "simple interest" loans.

Here's how it works.  Suppose you take out a loan at a nominal
rate of 12% per year (actually 1% per month).  When you get the
loan, you are given some amount of money, which is what you owe
at that point.  Each month, the following calculation is done:

	new balance = old balance * 1.01 - payment

When the new balance is 0, your debt is erased.

You can pay as much as you like, as long as each payment is
at least some stipulated amount.  This amount is chosen so
that if you pay the minimum each month, your balance will
reach 0 at the end of the nominal term of the loan.

For example, suppose you borrow $100,000 for 30 years at 12%.
Assume, for the sake of argument, that you take out the loan
on January 1, 1985.  Then, on January 1, you receive a check
for $100,000 and you agree to pay at least $1028.61 each month.

Your first payment is due February 1.  After you have made that
payment, you owe:

	100000 * 1.01 - 1028.61 = 99971.39

so $1,000 of your payment has gone to interest and $28.61 to
principal.  Your next payment is due March 1.  You then owe:

	99971.39 * 1.01 - 1028.61 = 99942.49

so $999.71 of that payment has gone to interest and $28.90 to
principal.

Now, suppose you win $50,000 in a lottery and want to pay back
part of your loan early.  So, instead of sending in $1028.61
for your April 1 payment, you send $50,000.  You now owe:

	99942.49 * 1.01 - 50000.00 = 50941.15

Of your $50,000, $999.42 has gone to interest and the remaining
$49,000.58 has gone to principal.  Now, you send in your normal
$1028.61 on May 1, so after that you owe:

	50941.15 * 1.01 - 1028.61 = 50421.95

On this payment, $509.41 has gone to interest and the remaining
$519.20 has gone to reduce your principal.  In fact, if you continue
making your payments on the normal schedule, you will retire the
loan in about five and a half years instead of the 30 originally
planned, and the total interest you pay will be that much less.

				--Andrew Koenig