Borrower A bought a house and opened a 30-year fixed rate mortgage, $300K balance, at 6% and is scheduled to make their first mortgage payment December 1st. Borrower B is 10 years into a 30-year fixed rate mortgage with a remaining balance of $300K and rate of 6%. Next payment due December 1st. Borrower C refinanced and opened a 15-year fixed rate mortgage, $300K balance, at 6% and is scheduled to make their first payment December 1st. Assume all three borrowers are making their minimum monthly payment. Who is being charged the most interest by their lender for the December 1st payment? We are only considering the interest for the December 1st payment. LO’s, let non-mortgage business folks get some answers in first.
Little help for everybody trying to answer this. Mortgages are simple interest loans. The P&I breakdown on the payments is based on the balance. All 3 scenarios have the same principal balance at the time the December payment is due. Therefore the interest amount on the December payment will be the same for all 3 scenarios.
@Dior
Bingo. I find it interesting that installment loan amortization is often believed to be more complicated than it actually is. Or that the amortization table is ‘manipulated’ in some way.
Mica said:
@Dior
Bingo. I find it interesting that installment loan amortization is often believed to be more complicated than it actually is. Or that the amortization table is ‘manipulated’ in some way.
I’m always seeing it pitched like it’s some kind of scheme to front load the interest. You’re literally just paying for whatever funds you have borrowed at that time. Of course the interest will be higher when you owe more. But it’s not a conspiracy it’s just math
Lol, was this posted because of that thread we were both in based off of my comment? Here is the math: 6%/365= .01644% interest compounding daily. .01644% * 30 (days in the period) * $300,000 = $1479.45 in interest. All parties will pay this much in interest at a 6% rate with $300k in principal remaining. What is different, is the amount of principle paid per period. An installment loan with a fixed interest rate and time period has equal payments throughout the loan. So the PMT for a: A 30 year, 6% loan at $300k is $1798.65 B 30 year, $400,000, 6% loan will be $2398.20. C 15 year, 6% loan for $300k would be $2531.57. So the 15 year loan (C) will be paying more principal per installment, and will pay it off 5 years faster than B this loan if they are already 10 years into the loan. A is paying the least amount of principle, and thus will payoff 15 years slower than C. Note: $400k probably wasnt the right initial principle, but its close enough for an approximation for Borrower B.
@Mica
Just friendly fyi; To get interest compounded at some interval its not interest rate / interval. It’s 1 + interest rate ^ ( 1 / interval) so compounding daily would be (1.06 ^ ( 1/365)) - 1 = 0.00015965 (so daily interest is 0.00015965 * outstanding principal.
@Mica
It’s a simple question, who is paying the most interest December 1st? Trying to help educate people since there are a lot of misconceptions about how interest is calculated.
Fifer said:
@Mica
It’s a simple question, who is paying the most interest December 1st? Trying to help educate people since there are a lot of misconceptions about how interest is calculated.
They all pay the same amount of interest. The amount of principle paid per period varies, and therefore the ratio of interest/principle varies.
@Mica
Correct. For the record, I agreed with your comment on the other post. People can always choose to pay more or less principal. So in your example the borrower A could pay borrower C’s monthly payment and pay it off in the exact same amount of time.