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A Step By Step Approach To Mortgage Calculators (Page 2) Step 3: The Next Level Let us now compare two amortizing loans with all the same terms except the interest rate and also let us anticipate that we will sell the property in 8 years and pay off the loan early from the previous page. Now click here for COMPARE TWO MORTGAGES (Type 2). The default "Mortgage Terms" for both loans is 30 years. The default rate for the new loan is 4.125% and the default rate for the old is 5.125%. The default value for "How Long Do You Expect To Live In The Home?" is 30, however change this to 8. Generating the results will then show 1) a difference in the rates of 1.00%, 2) a difference in the monthly payment of $59.84, 3) a difference in total interest payments over the life of the two loans of $7,841, and 4) a difference in total payments (principal & interest) over the life of the two loans of $7,841. The schedule at the bottom will display the details relating to the differences in the annual payments. You will see that at the end of the 8th year both loans will stop and the difference in the payments for the 8th year will be $2,815. This is a great little analysis. The difference between the results in Step 2 and in Step 3 ($21,541 - $7,841) or $13,700 represents the lost opportunity benefit for closing out the loan early in the 8th year rather then holding the loan until maturity. This analysis is relatively 1) clean and 2) straight forward, but 3) NOT so easy to interpret. It is not so easy to interpret because many people get somewhat confused by the difference in the payments in the 8th year (the year the payoff of the loan occurs) or $2,815. They expect the difference to be the same in the 8th year as in all of the prior years, i.e. the difference in the monthly payment multiplied by 12 months or ($59.84 x 12) or $718. The reason for this additional difference ($2,815 - $718) or $2,097 is the result of less principal balance being owed on the new mortgage versus the principal balance being owed on the old mortgage in the 8th year. Why does this occur? This has to do with the rate at which the principal balance declines in the two amortizing loans. If we compare the two loans, the lower interest rate loan's principal balance will decline more rapidly in the earlier years than the higher interest rate loan, and the higher interest rate loan's principal balance will decline more rapidly in the later years than the lower interest rate loan. However there are some limitations to this type of simple mortgage calculator; i.e. 1) no ability to adjust for a loan which may have already begun amortizing, and 2) no ability to adjust for the effects of present value and the time value of money. Step 4: Intermediate Let us now compare two 30 year amortizing fixed rate loans, an old loan and a new loan. The new loan will have a principal balance of $100,000 and we will assume the old loan (the current existing loan on the property) was originally $105,000, has been amortizing for 3 years and has a remaining principal balance of $100,214. Now click here for COMPARE TWO MORTGAGES (Type 3). The default "Mortgage Terms" for both loans is 30 years. The default rate for the new loan is 4.125% and the default rate for the old is 5.125%. The default balance for the new loan is $100,000 and for the default balance for the original old loan is $105,000. The default remaining principal balance on the old loan is $100,214. The default value for "How Long Do You Expect To Live In The Home?" is 30. Leave this at 30 for now. Now generating the results will show 1) a difference in the rates of 1.00%, 2) a difference in the monthly payment of $87.06, 3) a difference in total interest payments over the life of the two loans of $10,547, 4) a difference in total payments (principal & interest) over the life of the two loans of $10,761, and 5) a difference in the term of the loans of 3.0 years or (30.0 - 27.0). The schedule at the bottom will display the details relating to the differences in the annual payments. You will see that at the end of the 27th year the original loan will stop because it has fully amortized and the difference in the payments in years 28, 29, and 30 will be $5,816. This is a great little analysis. This analysis is relatively 1) clean, but 2) NOT so straight forward, and 3) NOT so easy to interpret. However there are some limitations to this type of simple mortgage calculator; i.e. 1 ) no ability to adjust for the effects of present value and the time value of money. Click here to continue reading on the next page. By Using This Website You Agree That You Have Read and Understand Our Disclaimer! |
PROPERTY VALUES