Mortgage Amatorization Explination

Ok, I keep hearing/seeing people say things like restarting your mortgage thows away years of progress you've made and that your Amatorization schedule is interest loaded into the first few years of your mortgage.

Please someone who is familiar with this explain it to me so I understand why people think this.

Here is my understanding of Mortgages, Interest, and Amatorization.

I take out a mortgate for $100,000 @ 6% for 30 years Fixed rate, no points, no closing costs, so just a very very simple mortgage.
I will make 360 Identical payments of $600 for a total loan cost of 216,000. Each month the bank will calculate the interest accrued at 6% anual using whichever form of compounding costs me the most and reduce my $600 payment by this amount. Lets just say the compound monthly so the interste accrued over the month is simply 0.5% per month. So as my loan value drops the amount of interst I accrue each month. I start with 100,000 so month 1 interst is 500 giving me an actual Principal payment of 100 for month 1. Month 2 my Loan value is 99,900 so my Interst accrued month 2 is 497.50 and my principal payment will be 102.50. it goes on and on like this until my last month payment is against a loan balance of $597 so interest accrued is $3 and my loan balance will be 0 after my $600 payment. The amatorization table is simply this reduction in accrued simple interest charted over the 360 payments.

Is this correct?

In this way there is no penalty to re-start my mortgage at any point assuming I don't raise my principal value and don't raise my interest rate (less closing costs obviously). AS long as this is true I will be at the same value of interest accruing each month as I am on my current loan. My payment will go down because my term will be longer but it doesn't mater.

Put another way If I'm @ year 10 on a 30 year fixed mortgage and I refinance into a same rate 20 year loan nothing will change.

Again is this correct?

nocones wrote: ...is this correct?

Basically yes, and kudos for recognizing the difference between amortizing and simple interest. If you could do a no-cost note modification it would be that easy.

*amortization. Not being a dick. Just in case you want to do a google search or something.

Fair enough I for some reason nearly always screw up spelling that word. So it sounds like my understanding is correct so why do people feel they throw away years or that amortization is something tricky that banks do?

It works like this:

You borrow 1 million dollars at 10% interest for 10 years. All teh maths works out so that each payment you are paying 10% interest on the balance of the million and just enough of the principal so that at the end of 10 years, you are even. Being math whizzes, or hiring them anyway, the banking industry came up with a further scheme whereby instead of calculating the interest due on that million annually, they could get more if they calculated what you owe, including the interest accumulated since the last payment, monthly. Then they "discovered" that calculating it daily meant they would get more. And if daily was good, why not by the minute? Second? Fraction of a second? That's where teh maths came in and from the wonders of Calculus (Thank's Isaac Newton), interest is recalculated to the infinity (constantly).

Want to win? You have a 30 year mortgage. Throw money at the principal. Make sure it goes to the principal or they will berkeley you by putting it on "future payments" instead. Throw as much as you can at it as often as you can. Your 30 year mortgage will be payed off in no time at all, and each month, more of your regular payment will go to the principal and less to the profit of the banking industry.

As I understand it, it would only affect loans that unevenly distribute interest payments. I am fairly certain my student loan payments distribute more interest up front, and while my payment stays the same it affects what I can deduct from taxes, since student loans (and mortgages for this instance) interest paid can be deducted. So in my current situation I am not making enough money to really pay anything extra on principle so it benefits me by having less tax liability come next year. As soon as I get a new job and make enough to pay down principle on occasion, I will consolidate to a more traditional style loan and do just that.

If I am wrong, please correct me, but most of the easier to get loans are structured this way, so maybe that is people have this preconceived notion that they are throwing away money.

nocones wrote: Put another way If I'm @ year 10 on a 30 year fixed mortgage and I refinance into a same rate 20 year loan nothing will change. Again is this correct?

Yes, assuming no closing costs.

But when many people refinance, they are just looking to reduce their monthly payment. By turning their 30 year mortgage into a 10 year + 30 year mortgage, they loose a lot of money in the long run through 10 extra years of interest charges.

Well don't they really lose it because they are borrowing.g money for more time 40 years vs 30.

I'll look into loans that actually charge more interest rate early in the loan. That sounds like variable interest to me. How would that work on a fixed interest loan? Wouldn't they be charging interest you haven't earned?

WOW! There's not even a good place to jump in with all the misinformation. I'll wait till someone starts over.

carguy123 wrote: WOW! There's not even a good place to jump in with all the misinformation. I'll wait till someone starts over.

Why don't you clear it up. That was the whole point of the thread. If I am the one spreading misinformation please tell me how it is I genuinely want to know and understand this better.

What I described is how the interest calculation, billing, and amortization worked on the 2 houses with 5 mortgages I have held(80/20 initial, 95% LTV refinance, 78% LTV refinance paid off, then a 75% LTV purchase since paid off). During these loan originations I was offered interest only, variable, FHA, and fixed interest fixed term loans with and without points. All loans I was presented worked in the way I described. Except obviously the interest only loans.
I was only descibing my experiences with these loans hoping to get a better understanding of what is out there that is making people say the things they say. Please contribute you knowledge and inform the ignorant. I know you work in mortgage and lending so it would be helpful.

bludroptop wrote: Basically yes, and kudos for recognizing the difference between amortizing and simple interest. If you could do a no-cost note modification it would be that easy.

That's not right. There is no relationship between the word "amortize" and the word "simple interest". They are not opposites.

Amortization refers to spreading payments over time. All loans are amortized.

Simple interest is a method of calculating interest. It basically refers to an interest calculation based on the original amount only.

Compounding interest is when interest is paid on the original amount, but also on the increased interest amount that has accrued.

Simple vs compounding are generally terms used to apply when you are earning interest, not paying it. They don't actually relate to home mortgages (exactly). There are many other ways to calculate interest rates.

All home mortgages have amortization tables or rates. Some are front loaded, or even have the potential to actually work in reverse (leaving the owner with no principal when it is all over).

nocones wrote: What I described is how the interest calculation, billing, and amortization worked on the 2 houses with 5 mortgages I have held(80/20 initial, 95% LTV refinance, 78% LTV refinance paid off, then a 75% LTV purchase since paid off). During these loan originations I was offered interest only, variable, FHA, and fixed interest fixed term loans with and without points. All loans I was presented worked in the way I described. Except obviously the interest only loans.

It used to be that a lot of car loans were "rule of 78s". This is a type of loan where they precompute how much interest you owe over the life of the loan (at the standard payment schedule) and then set up the payments so that you're paying most of the interest first, and the principal last. Paying it off early thus does not result in substantial interest savings. See here:

http://en.wikipedia.org/wiki/Rule_of_78s

I haven't had anyone try to offer me a rule of 78s loan since the mid 90s, I dunno if they bother any more. I've never seen a mortgage offered that way, although I'm sure it's been tried.

In reply to nocones:

Your original description was pretty close. The only difference is they don't compound it monthly (usually daily), and your payments are not technically tied directly to the amortization table. It is just a chart to show what it would be if you paid in exactly the terms of the table. In actuality, it is calculated daily, so the payments (and interest due) would be exactly tied to when your payments were received.

The concept of "throwing away years of progress" is essentially a misnomer, except that there are almost no loans without fees, legal or administrative expenses, or origination costs. These typically get wrapped into the new mortgage, which equates to a larger principle (so there IS a loss).

The direct loss is one of time (which you mentioned), and there is a perceived loss because of the increase in loan amount (because of added fees) and because people keep reading those stupid amortization tables like they think they actually understand what they mean.

Your summary was close enough to be accurate, as long as you are also aware of the fees involved.

The common term is refinance rather than restart. Typically, the only reasons you would refinance is to get a lower interest rate or to increase the balance of the loan to provide you with cash for something else.

If lowering the rate, then it is often a good idea if the fees don't bite you back. If you keep the remaining term the same as you describe, then you haven't delayed the repayment of the loan. Most people refinance with a longer term because it provides the lowest payment. If you do this every few years in a declining interest rate environment (like we have had lately), then your original 30 year loan becomes 40, 45, etc. Congratulations on thinking past the payment amount, many people never do when buying houses and cars.

However, mortgages are generally offered as 15 and 30 years. It would be hard to find a 20 year mortgage. If you can, the interest rate will not be as favorable since it is an unusual product, which could negate the reason for doing the refinance in the first place. If you are truly thinking of refinancing under the scenario you describe, check out a 15 year mortgage. The interest rate will be even lower than a longer term and you'll pay off the house more quickly.

Basil Exposition wrote: The common term is refinance rather than restart. Typically, the only reasons you would refinance is to get a lower interest rate or to increase the balance of the loan to provide you with cash for something else. If lowering the rate, then it is often a good idea if the fees don't bite you back. If you keep the remaining term the same as you describe, then you haven't delayed the repayment of the loan. Most people refinance with a longer term because it provides the lowest payment. If you do this every few years in a declining interest rate environment (like we have had lately), then your original 30 year loan becomes 40, 45, etc. Congratulations on thinking past the payment amount, many people never do when buying houses and cars. However, mortgages are generally offered as 15 and 30 years. It would be hard to find a 20 year mortgage. If you can, the interest rate will not be as favorable since it is an unusual product, which could negate the reason for doing the refinance in the first place. If you are truly thinking of refinancing under the scenario you describe, check out a 15 year mortgage. The interest rate will be even lower than a longer term and you'll pay off the house more quickly.

I agree with almost everything you said, except for the availability of other than 30 and 15. My first house I bought with a 30, refinanced into a no-cost 20, and then refinanced again into a no cost 15. My second house, I bought with a 15 and then refinanced 3-4 months ago into a 10. In all cases, the shorter term resulted in a lower rate. The 20 was less than a 30 (but higher than a 15) and the 10 was retarded low - I got 2.75% when 15's were at 3.125% and 30's were at 3.5%

The only time I've increased my balance was in this latest refi. My principle balance was ~$96k and rates were higher for loans with less than a $100k balance, so I refi'd @ $100k, and then paid the excess back into the loan immediately.

My brain hurts.

pinchvalve wrote: My brain hurts.

It will have to come out.