# Tag Info

72

In other words, math. All the other answers are great, but I thought I might add something concrete to clarify slightly. Consider a counterexample. Suppose I borrow \$120000 at 1%/month interest (I know mortgages are usually priced with annual rates, but this will make the math simpler). Further suppose that I want to pay a fixed amount of principal each ...

34

It's not correct. You pay both principal and interest on amortized loans. What happens is that you pay the interest accumulated on that principal during the period. As the time passes - some of the principal is paid off, allowing you to leave more for the principal because the interest becomes less. Thus the longer in the term - the quicker the growth of the ...

23

Assume a month to month mortgage. This is a simplification, but it will illustrate the point. Borrow \$100,000 at .5% a month. Make a payment of \$1000 each month. So, for the first month, it will cost you \$500 in interest to borrow the entire balance for one month. When you make your payment, \$500 goes to interest, and 500 goes to principal. Your new ...

23

Actually, mortgages do not "compound" at all. Compounding means that interest is charged on top of past interest, which is not true for mortgages. Conforming mortgages in the US use simple interest, where interest is calculated based on the principal amount remaining, and late/unpaid interest is not added to the principal (unlike a credit card, for example). ...

17

Amortizing loans pay off some of the value of the loan (otherwise known as principal) with each payment, whereas non-amortizing loans only pay the interest, so the full value of the loan is still owed at the end of the loan. This means that with an amortizing loan you progressively pay off the loan value bit by bit as time goes on.

11

Banks don't make you pay different amount of principal at different stages of the mortgage. It's a consequence of how much principal is left. The way it works is that you always pay off interest first, and then any excess goes to pay off the principal. However early in the mortgage there is more interest, and so less of the payments go toward principal. ...

9

Can you reduce your interest rate? Talk to the lender. Maybe. Probably not. The rate reflects their perception of how much of a risk they're taking with the loan. But if all you're borrowing is \$2000, the savings that you might get out of any adjustment to the rate is not going to be all that significant. Sure, it would be nice, but it's not going to be ...

7

Their examples adequately demonstrate the difference between partially amortized and fully amortized loans, especially since it's in the context of commercial lending, where 30-year terms are uncommon. The point is, if the amortization period is longer than the term then you have a partially amortized loan (balloon payment due at end), and if the ...

7

It will most likely be \$2,380. This will depend on the specifics of your mortgage contract, but the monthly payment generally won't automatically change in this situation. If you're paying off such a substantial portion of the outstanding balance, you may want to look at refinancing the loan entirely to get a lower interest rate and/or lower monthly ...

7

For every loan I have had the last payment was a slightly different amount. The delta was to account those fractions of cents. For a 30 year loan the delta would be at most \$3.60 for the last payment.

6

The underlying calculations are simple, and you can easily replicate them. Let's look at the first few months. Month 1: Balance = Initial balance = 300,000 Interest = Balance * Rate = 300,000 * (0.04 / 12) = 1,000 Principal = Minimal Payment + Additional payment - Interest = 1,432.25 + 100 - 1,000 = 532.25 Month 2: Balance = Month 1 balance - Month 1 ...

6

In your title you ask what happens typically. In the body of the question you ask if you have to specify how the extra payment will be treated. The answer is you have to ask your lender about your loan. My loan is through my credit union. I can make an extra payment anytime I want. The form on the website allows me to specify if the payment is to be ...

6

Initially, lets say I pay around 1000 USD (200 toward my principal and 800 towards my interest).(May not be accurate numbers) Now the balance left on my mortgage is 159,000. This is incorrect. Your balance is now \$160,000 - \$200 = \$159,800. I realized through internet that the additional payments would only cut the down the 30yr term. That is, instead of ...

5

Here is a simple example based on Joe's discussion in comments. Suppose that for a given month you owe \$50 of interest. Let's say you make a \$100 payment. If all of this money goes to the principal, you reduce the principal by \$100. But you did not pay the \$50 interest, so it gets added to the principal. This means you reduced the principal by \$100 but ...

5

Talk to your bank first but shop around a bit as well with other reputable lenders in your area. Another option, if you're willing to put down ~84% of the purchase price would be to talk to several dealerships BEFORE you set foot on a single lot. Tell them that you are interested in buying a Versa and that you are willing to pay cash but you are not ...

5

Each month, the lender adds the month's interest to the outstanding balance and then subtracts the payment received. In this case, the lender adds an extra charge, still proportional to the outstanding balance, before crediting the payment. So, the effect of the insurance is the equivalent of increasing the monthly rate by 0.038 percentage point. So, if ...

5

I calculated 14098.64 and 14098.74. Here are the methods. First, what I would say is more mathematically correct. For a loan with equal payment periods we have the standard formula below. pv = present value of principal c = periodic repayment amount r = periodic interest rate n = number of periods With an extended first period the formula is changed ...

5

Outside of any payment plan that might be set up, credit cards don't amortize - they charge interest on the unpaid balance at the end of the month, without regard for previous months, and then add that to the balance. Any amount you pay the credit card company is applied to that balance -- there's no differentiation between principal and interest, because ...

5

Credit cards don’t have fixed monthly payments like a mortgage or other traditional loan. As a result, there isn’t really a distinction between “principal-only” payments vs. future pre-payment as there is with a mortgage. When your credit card statement is generated, the bank adds any finance charges for the month to your balance. This finance charge is ...

5

Your remaining principal balance will be \$38,528.86. And you will have paid \$8,238.03 in interest. You can calculate this (or any other amortization) with a fairly basic spreadsheet. Put your principle amount in the first column. In the next column, multiply it by the interest rate for that month (APR divided by 12). In the next column, enter the amount ...

5

Yes, about 5% With monthly rate r and principal s = 511200 payments d = 9628 no. months n = 5*12 Equating net present values Solving for r s = (d - d (1 + r)^-n)/r ∴ r = 0.00409911 Nominal interest compounded monthly is 12*r = 4.91893 % Effective annual interest is (1 + r)^12 - 1 = 5.03136 % The former is APR in the US and the latter is APR in ...

5

People already answered, but the point is you have a flaw in your thinking. December interest is not interest on december's principal payment amount. You're paying interest on \$300k (which is why it's so much), not on \$450 (which would be 200% interest per month), your december interest is reduced by about 0.3% (3.7%/12) of \$450 (the additional principal you'...

5

You're muddling up two things but you're very close. Say you buy a house for \$100,000. You have \$20,000 of your own and you borrow \$80,000 from the bank. At that moment you have equity of \$20,000. In each payment, some goes to the principal (which started at 80k and will go down over the term of the loan) and some is charged as interest. So, all else being ...

5

Fair is obviously in the eye of the beholder and whatever the four of you agree to is, by definition, fair. Were it me, I'd do something like this Initially, sister and brother-in-law own 500,000/ 2,175,000 = 22.98% of the house Initially, you and your partner own 100,000/ 2,175,000 = 4.60% of the house Initially, the bank owns the remaining 72.41% of the ...

4

Banks make you pay accrued interest on the current outstanding balance of the loan each month. They want their cost of capital; that's why they gave you the loan in the first place. On top of this, you will want to pay some additional money to reduce the principal, otherwise you're paying interest forever (this is basically what large companies do by issuing ...

4

With that credit rating you should have no trouble getting a rate in that range. I have a similar credit score and my credit union gave me a car loan at 1.59%. No haggling required. In regards to your question, I think you have it backwards. They are more likely to give you a good rate on a high balance than a low one. Think about it from the bank's ...

4

The way the loan is structured, "duration to payoff" is the basic factor that determines the total loan payment per month, along with a general desire to have a stable mortgage payment (ie, the same payment every month). This drives the small amount going to principal (not the large amount going to interest). At any given time, for a particular month, you ...

4

I must say that this is a question that you should hire a professional tax adviser (EA/CPA licensed in your State) to answer. It is way above our amateurs' pay-grade. That said, I'll tell you what I personally think on the issue. I'm not a licensed tax adviser, and nothing that I write here can be used in any way as a justification for any action. Read the ...

4

One way to perhaps reduce the confusion is to realize that there is no distinction between principal and interest. Say you borrow \$100,000 and agree to pay it off with equal monthly payments over 20 years, while paying interest at 12% a year, compounded monthly (or 1% a month). So you walk out with \$100,000, and the mortgage company sets up a leger page ...

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