MORTGAGE CALCULATORS(More Info) |
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A STEP BY STEP APPROACH © 2005 - 2007 |
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Step 3: The Next Level
Compare Two Mortgages (Type 2) Let us now compare two amortizing loans with all the same terms except the This is a great little analysis. The difference between the results in 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. 2) and the time value of money. no ability to adjust for the effects of present valueCompare Two Mortgages (Type 3) 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 . Leave this at 30 for nowNow 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 This is a great little analysis. This analysis is relatively However there are some limitations to this type of simple mortgage calculator; i.e. Compare Two Mortgages Using PV (Type 1) Let us now consider present value or the time value of money. We are going to apply present value to the results generated in Step 2. Again, compare two amortizing loans with all the same terms except the interest rate. So click here for However there are two additional input fields; 1) an input field for a discount rate, and 2) an input field for the costs to close the loan. The discount rate field has a default value of 5.125% and the "costs to close the loan" field has a default value of $2,500. For now just leave these set to their default values. Generating the results will show 1) a difference in the rates of 1.00%, 2) a difference in the monthly payment of $59.84, 3) a difference in Please note the following important assumptions: 1) Closing costs of the loan, which would include lawyer's fees, title insurance, loan application fees, appraisal fees and any other fees associated with closing and processing the loan. 2) In determining a discount rate we assume a flat yield curve. It would be much too complex to construct a yield curve using current treasury prices by applying a process referred to as cubic splining and then subsequently discounting the difference in the cash flows between the two mortgages using the various rates along the curve that coincide with the various cash flows. It is deemed sufficient for consumer purposes to assume a flat yield curve. If you are the This is a great little analysis. It is However there are some limitations to this type of mortgage calculator; i.e. 2) . no ability to adjust for a loan which may have already begun amortizingIn comparing the result from Step 2 to the results here in Step 5, it becomes apparent that If you are interested in applying an adjustment for terminating the loan before maturity then try these two calculators, Click here to continue reading on the next page. |

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