Is the effective interest rate of a loan higher when it’s early in amortization period?
Is the effective interest rate of a loan higher when it’s early in amortization period?
All else equal, paying down a loan with 5% interest is a wiser decision than paying down a loan with 4% interest - understood.
What if the 4% loan is very early in amort period vs. 5% loan is almost all principal - you could be saving more in interest dollars paid, no?
Same question goes for if both rates are the same - what if one loan is amortizing and one loan is a term loan?
And I’ve been working in financial services for 5 years!
What if the 4% loan is very early in amort period vs. 5% loan is almost all principal - you could be saving more in interest dollars paid, no?
Same question goes for if both rates are the same - what if one loan is amortizing and one loan is a term loan?
And I’ve been working in financial services for 5 years!
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
The rate is the rate. It doesn't change due to how far into the amortization period you are.
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Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
If you pay down a 4% loan you are paying down at a effective rate of 4%. It does not matter if it is day 1 or the 29th year of a 30 year mortgage. Same for 5%.
The correct answer is pretty easy and intuitive if you think about it. First, treat the loan as a negative bond. Figure out what your correct asset allocation is. Figure out how you want to invest your additional dollars. Think about the loan in terms of opportunity costs. Think about the (mostly modest) impact of leverage, cash flow requirements (i.e. flexibility), and your risk adjusted return.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
No, assuming interest on both loans is calculated on the daily outstanding balance. Is interest on the term loan calculated on the daily outstanding balance?Clarice wrote: ↑Wed Nov 06, 2019 12:19 pm All else equal, paying down a loan with 5% interest is a wiser decision than paying down a loan with 4% interest - understood.
What if the 4% loan is very early in amort period vs. 5% loan is almost all principal - you could be saving more in interest dollars paid, no?
Same question goes for if both rates are the same - what if one loan is amortizing and one loan is a term loan?
And I’ve been working in financial services for 5 years!
The interest rate is the interest rate.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
If I have two loans with the same interest rate starting at exactly the same time, the amortizing loan has more interest dollars up front - so i would be better off paying that loan first.... no?
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
No.
You need to compare apples to apples. This means you must keep the cash flows the same under both analysis.
Let us say you have 2 loans and a extra $X to pay down one loan. Once you pay off one loan, you will direct the cash flow servicing that loan to pay off the other. Now, which loan should you pay off first? It does not matter. You will have the same end date both ways. You will pay the same interest either way. Note, this assumes identical cash flows and interest rates.
I think I know what you are thinking. It is like the idea that heavy objects fall faster than light ones. Intuitive but wrong.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Doesn’t matter. The only thing changing as a loan amortizes is the amount of the loan balance subject to interest.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
The rate is the rate - if you pay down the principal the duration changes and the total amount of interest paid is less but the rate is the same.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Sorry all let me rephrase the question in the title then -
Is it a better decision to pay off one loan vs. another when everything about those two loans is the same ASIDE from the fact that one loan is term and one loan is amortizing, and we are early in amort period?
Is it a better decision to pay off one loan vs. another when everything about those two loans is the same ASIDE from the fact that one loan is term and one loan is amortizing, and we are early in amort period?
Amortizing v. term loan, same rates, early in amort period - what to pay off first?
Clarice wrote: ↑Wed Nov 06, 2019 12:19 pm All else equal, paying down a loan with 5% interest is a wiser decision than paying down a loan with 4% interest - understood.
What if the 4% loan is very early in amort period vs. 5% loan is almost all principal - you could be saving more in interest dollars paid, no?
Same question goes for if both rates are the same - what if one loan is amortizing and one loan is a term loan?
And I’ve been working in financial services for 5 years!
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Sorry, the answer is still "no" - there is no difference. The math is ironclad on this. No way to get around this. We could look at second order factors.
I might favor paying off the shorter term loan first. You would pay that one off first, giving one the optionality of paying down the longer dated loan next (see my cash flow analysis up top) or of redirecting that cash flow to some other endeavor - either as another investment or having extra flexibility to handle emergencies.
On the other hand, I might favor paying off the longer term loan - for exactly the same reason. Some people find it had to maintain discipline when investing. It is so much easier to skip a payment towards your IRA and buy that expensive toy / vacation / extra weekly latte. No optionality, so you are forced to "save" by "investing" in your negative bond.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
I do not agree. If I have a limited amount of money to prepay one loan or the other then I save more interest dollars today by paying towards the amortizing loan...
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Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Will follow up.CedarWaxWing wrote: ↑Wed Nov 06, 2019 1:22 pmPlease show your math in regards to how you come to this conclusion.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
That is not a definition. I'm not sure that you understand how loans work. Again, please define what you mean by these two types of loans. Better yet, provide a mathematical example for each.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Are you thinking about a revolving line of credit which has no fixed end date? Much like a credit card?
If so - the answer is still no. The math still holds. After all, one only needs an interest rate and a cash flow. Interest paid will remain the same.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Because you don’t understand you tell me that I must not understand myself?
Term loan = fixed P&I per payment (think personal loans I believe)
Amortizing loan = front-loaded with interest (think mortgage)
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Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
How is this "term loan" repaid, if paying the 'minimum due". to make an appropriate comparison with the amortizing loan?
RM
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Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
If P&I is fixed, than you can't make early payments so this question is more or less moot.
May I ask where you live? I somebody who has worked in banking compliance this is externally rare in the US for personal loans. It has been a few years, but I think the sole exception might be early payment penalties on a few products. This makes the math a bit more interesting but it is not going to shift the analysis much.
Once again, the only inputs you need to know in this situation is interest rate and cash flow. The rest can flow from that.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Are you talking about term loan with variable payments. These do occur in other countries but no USA.
Personal, 401k, auto, mortgage are all amortized loans in USA. Some pay day loans look like term loan but even they amortize since the unpaid is rolled over to next loan.
IN Brazil/India/China there are term loans tied to some thing like banks individual prime rate that adjusts every quarter/year. This changes payment. Somewhat equivalent is ARM loans for mortgage in USA.
Even then, math is math. Pay off the higher interest rate unless there is expected term adjustment that is going to increase it substantially. Then you can adjust the interest rate on that loan to some equivalent number for apples to apples comparison.
BTW: I think you have it opposite. Here is the definition of amortize
::to pay off (an obligation, such as a mortgage) gradually usually by periodic payments of principal and interest or by payments to a sinking fund
Personal, 401k, auto, mortgage are all amortized loans in USA. Some pay day loans look like term loan but even they amortize since the unpaid is rolled over to next loan.
IN Brazil/India/China there are term loans tied to some thing like banks individual prime rate that adjusts every quarter/year. This changes payment. Somewhat equivalent is ARM loans for mortgage in USA.
Even then, math is math. Pay off the higher interest rate unless there is expected term adjustment that is going to increase it substantially. Then you can adjust the interest rate on that loan to some equivalent number for apples to apples comparison.
BTW: I think you have it opposite. Here is the definition of amortize
::to pay off (an obligation, such as a mortgage) gradually usually by periodic payments of principal and interest or by payments to a sinking fund
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Thanks for the help, all. Probably could have been a little clearer in the product type I was referencing. Better off paying amortizing loan before a fixed principal loan it looks like.
To the poster who said fixed-principal products don't exist in the US - I doubt that as it is more beneficial for the consumer.
To the poster who said fixed-principal products don't exist in the US - I doubt that as it is more beneficial for the consumer.
Code: Select all
AMORTIZING
Rate 5%
Term (months) 60
Period Balance Principal Interest Payment
0 $1,000,000
1 $985,295 $14,705 $4,167 $18,871
2 $970,530 $14,766 $4,105 $18,871
3 $955,702 $14,827 $4,044 $18,871
4 $940,813 $14,889 $3,982 $18,871
5 $925,862 $14,951 $3,920 $18,871
6 $910,848 $15,013 $3,858 $18,871
7 $895,772 $15,076 $3,795 $18,871
8 $880,634 $15,139 $3,732 $18,871
9 $865,432 $15,202 $3,669 $18,871
10 $850,166 $15,265 $3,606 $18,871
11 $834,837 $15,329 $3,542 $18,871
12 $819,445 $15,393 $3,478 $18,871
13 $803,988 $15,457 $3,414 $18,871
14 $788,467 $15,521 $3,350 $18,871
15 $772,881 $15,586 $3,285 $18,871
16 $757,230 $15,651 $3,220 $18,871
17 $741,514 $15,716 $3,155 $18,871
18 $725,732 $15,782 $3,090 $18,871
19 $709,885 $15,847 $3,024 $18,871
20 $693,971 $15,913 $2,958 $18,871
21 $677,992 $15,980 $2,892 $18,871
22 $661,945 $16,046 $2,825 $18,871
23 $645,832 $16,113 $2,758 $18,871
24 $629,652 $16,180 $2,691 $18,871
25 $613,404 $16,248 $2,624 $18,871
26 $597,089 $16,315 $2,556 $18,871
27 $580,706 $16,383 $2,488 $18,871
28 $564,254 $16,452 $2,420 $18,871
29 $547,734 $16,520 $2,351 $18,871
30 $531,145 $16,589 $2,282 $18,871
31 $514,487 $16,658 $2,213 $18,871
32 $497,759 $16,728 $2,144 $18,871
33 $480,962 $16,797 $2,074 $18,871
34 $464,095 $16,867 $2,004 $18,871
35 $447,157 $16,938 $1,934 $18,871
36 $430,149 $17,008 $1,863 $18,871
37 $413,070 $17,079 $1,792 $18,871
38 $395,920 $17,150 $1,721 $18,871
39 $378,698 $17,222 $1,650 $18,871
40 $361,405 $17,293 $1,578 $18,871
41 $344,040 $17,365 $1,506 $18,871
42 $326,602 $17,438 $1,433 $18,871
43 $309,092 $17,510 $1,361 $18,871
44 $291,508 $17,583 $1,288 $18,871
45 $273,852 $17,657 $1,215 $18,871
46 $256,121 $17,730 $1,141 $18,871
47 $238,317 $17,804 $1,067 $18,871
48 $220,439 $17,878 $993 $18,871
49 $202,486 $17,953 $918 $18,871
50 $184,459 $18,028 $844 $18,871
51 $166,356 $18,103 $769 $18,871
52 $148,178 $18,178 $693 $18,871
53 $129,924 $18,254 $617 $18,871
54 $111,594 $18,330 $541 $18,871
55 $93,188 $18,406 $465 $18,871
56 $74,705 $18,483 $388 $18,871
57 $56,145 $18,560 $311 $18,871
58 $37,508 $18,637 $234 $18,871
59 $18,793 $18,715 $156 $18,871
60 $0 $18,793 $78 $18,871
Total $132,274 $1,132,274
Code: Select all
FIXED PRINCIPAL
Rate 5%
Term (months) 60
Period Balance Principal Interest Payment
0 $1,000,000
1 $983,333 $16,667 $4,167 $20,833
2 $966,667 $16,667 $4,097 $20,764
3 $950,000 $16,667 $4,028 $20,694
4 $933,333 $16,667 $3,958 $20,625
5 $916,667 $16,667 $3,889 $20,556
6 $900,000 $16,667 $3,819 $20,486
7 $883,333 $16,667 $3,750 $20,417
8 $866,667 $16,667 $3,681 $20,347
9 $850,000 $16,667 $3,611 $20,278
10 $833,333 $16,667 $3,542 $20,208
11 $816,667 $16,667 $3,472 $20,139
12 $800,000 $16,667 $3,403 $20,069
13 $783,333 $16,667 $3,333 $20,000
14 $766,667 $16,667 $3,264 $19,931
15 $750,000 $16,667 $3,194 $19,861
16 $733,333 $16,667 $3,125 $19,792
17 $716,667 $16,667 $3,056 $19,722
18 $700,000 $16,667 $2,986 $19,653
19 $683,333 $16,667 $2,917 $19,583
20 $666,667 $16,667 $2,847 $19,514
21 $650,000 $16,667 $2,778 $19,444
22 $633,333 $16,667 $2,708 $19,375
23 $616,667 $16,667 $2,639 $19,306
24 $600,000 $16,667 $2,569 $19,236
25 $583,333 $16,667 $2,500 $19,167
26 $566,667 $16,667 $2,431 $19,097
27 $550,000 $16,667 $2,361 $19,028
28 $533,333 $16,667 $2,292 $18,958
29 $516,667 $16,667 $2,222 $18,889
30 $500,000 $16,667 $2,153 $18,819
31 $483,333 $16,667 $2,083 $18,750
32 $466,667 $16,667 $2,014 $18,681
33 $450,000 $16,667 $1,944 $18,611
34 $433,333 $16,667 $1,875 $18,542
35 $416,667 $16,667 $1,806 $18,472
36 $400,000 $16,667 $1,736 $18,403
37 $383,333 $16,667 $1,667 $18,333
38 $366,667 $16,667 $1,597 $18,264
39 $350,000 $16,667 $1,528 $18,194
40 $333,333 $16,667 $1,458 $18,125
41 $316,667 $16,667 $1,389 $18,056
42 $300,000 $16,667 $1,319 $17,986
43 $283,333 $16,667 $1,250 $17,917
44 $266,667 $16,667 $1,181 $17,847
45 $250,000 $16,667 $1,111 $17,778
46 $233,333 $16,667 $1,042 $17,708
47 $216,667 $16,667 $972 $17,639
48 $200,000 $16,667 $903 $17,569
49 $183,333 $16,667 $833 $17,500
50 $166,667 $16,667 $764 $17,431
51 $150,000 $16,667 $694 $17,361
52 $133,333 $16,667 $625 $17,292
53 $116,667 $16,667 $556 $17,222
54 $100,000 $16,667 $486 $17,153
55 $83,333 $16,667 $417 $17,083
56 $66,667 $16,667 $347 $17,014
57 $50,000 $16,667 $278 $16,944
58 $33,333 $16,667 $208 $16,875
59 $16,667 $16,667 $139 $16,806
60 $0 $16,667 $69 $16,736
Total $127,083 $1,127,083
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
I think you believe wrong.Clarice wrote: ↑Wed Nov 06, 2019 1:49 pmBecause you don’t understand you tell me that I must not understand myself?
Term loan = fixed P&I per payment (think personal loans I believe)
Amortizing loan = front-loaded with interest (think mortgage)
Unless you're talking a different personal loan than most of us are familiar with, it's basically the same as a mortgage. Whatever amount you borrowed, you can pay it off the next month and never pay interest on it again.
Technically a mortgage could be considered a fixed P&I per payment. If you check the amortization table given to you at closing time, it will tell what you will pay for P&I for 30 years. But, you can pay it down aggressively and effectively jump ahead on the schedule/table. Same as with a car loan or a personal loan. You will get a fixed payment amount on all of them. But, the monthly P&I amounts are figured off the remaining balance.
Mortgages are not "front loaded" with interest. You pay more interest in the early monthly payments simply because that's when the balance is bigger. When the balance gets lower, you pay less of the payment in interest.... same on a car or personal loan.
There is no effective rate (outside tax stuff) on a loan. The rate is the rate... same in month 1 as in month 30.
The true part of what I've read from you is, the sooner you pay extra on a loan... the more, the sooner, the better... the less total interest you pay on that loan. But, it has nothing to do with effective rates, or front loaded, or anything like that. It's simply because you lower the balance that much sooner. Or, you throw an extra $10k at a loan in month 2 (for example), you never pay interest on that $10k again.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
I believe this is the first time you have said "fixed principal", so that may have been the confusion between what you meant and what you were saying.Clarice wrote: ↑Wed Nov 06, 2019 3:52 pm Thanks for the help, all. Probably could have been a little clearer in the product type I was referencing. Better off paying amortizing loan before a fixed principal loan it looks like.
To the poster who said fixed-principal products don't exist in the US - I doubt that as it is more beneficial for the consumer.
Code: Select all
AMORTIZING Rate 5% Term (months) 60 Period Balance Principal Interest Payment 0 $1,000,000 1 $985,295 $14,705 $4,167 $18,871 2 $970,530 $14,766 $4,105 $18,871 3 $955,702 $14,827 $4,044 $18,871 4 $940,813 $14,889 $3,982 $18,871 5 $925,862 $14,951 $3,920 $18,871 6 $910,848 $15,013 $3,858 $18,871 7 $895,772 $15,076 $3,795 $18,871 8 $880,634 $15,139 $3,732 $18,871 9 $865,432 $15,202 $3,669 $18,871 10 $850,166 $15,265 $3,606 $18,871 11 $834,837 $15,329 $3,542 $18,871 12 $819,445 $15,393 $3,478 $18,871 13 $803,988 $15,457 $3,414 $18,871 14 $788,467 $15,521 $3,350 $18,871 15 $772,881 $15,586 $3,285 $18,871 16 $757,230 $15,651 $3,220 $18,871 17 $741,514 $15,716 $3,155 $18,871 18 $725,732 $15,782 $3,090 $18,871 19 $709,885 $15,847 $3,024 $18,871 20 $693,971 $15,913 $2,958 $18,871 21 $677,992 $15,980 $2,892 $18,871 22 $661,945 $16,046 $2,825 $18,871 23 $645,832 $16,113 $2,758 $18,871 24 $629,652 $16,180 $2,691 $18,871 25 $613,404 $16,248 $2,624 $18,871 26 $597,089 $16,315 $2,556 $18,871 27 $580,706 $16,383 $2,488 $18,871 28 $564,254 $16,452 $2,420 $18,871 29 $547,734 $16,520 $2,351 $18,871 30 $531,145 $16,589 $2,282 $18,871 31 $514,487 $16,658 $2,213 $18,871 32 $497,759 $16,728 $2,144 $18,871 33 $480,962 $16,797 $2,074 $18,871 34 $464,095 $16,867 $2,004 $18,871 35 $447,157 $16,938 $1,934 $18,871 36 $430,149 $17,008 $1,863 $18,871 37 $413,070 $17,079 $1,792 $18,871 38 $395,920 $17,150 $1,721 $18,871 39 $378,698 $17,222 $1,650 $18,871 40 $361,405 $17,293 $1,578 $18,871 41 $344,040 $17,365 $1,506 $18,871 42 $326,602 $17,438 $1,433 $18,871 43 $309,092 $17,510 $1,361 $18,871 44 $291,508 $17,583 $1,288 $18,871 45 $273,852 $17,657 $1,215 $18,871 46 $256,121 $17,730 $1,141 $18,871 47 $238,317 $17,804 $1,067 $18,871 48 $220,439 $17,878 $993 $18,871 49 $202,486 $17,953 $918 $18,871 50 $184,459 $18,028 $844 $18,871 51 $166,356 $18,103 $769 $18,871 52 $148,178 $18,178 $693 $18,871 53 $129,924 $18,254 $617 $18,871 54 $111,594 $18,330 $541 $18,871 55 $93,188 $18,406 $465 $18,871 56 $74,705 $18,483 $388 $18,871 57 $56,145 $18,560 $311 $18,871 58 $37,508 $18,637 $234 $18,871 59 $18,793 $18,715 $156 $18,871 60 $0 $18,793 $78 $18,871 Total $132,274 $1,132,274
Code: Select all
FIXED PRINCIPAL Rate 5% Term (months) 60 Period Balance Principal Interest Payment 0 $1,000,000 1 $983,333 $16,667 $4,167 $20,833 2 $966,667 $16,667 $4,097 $20,764 3 $950,000 $16,667 $4,028 $20,694 4 $933,333 $16,667 $3,958 $20,625 5 $916,667 $16,667 $3,889 $20,556 6 $900,000 $16,667 $3,819 $20,486 7 $883,333 $16,667 $3,750 $20,417 8 $866,667 $16,667 $3,681 $20,347 9 $850,000 $16,667 $3,611 $20,278 10 $833,333 $16,667 $3,542 $20,208 11 $816,667 $16,667 $3,472 $20,139 12 $800,000 $16,667 $3,403 $20,069 13 $783,333 $16,667 $3,333 $20,000 14 $766,667 $16,667 $3,264 $19,931 15 $750,000 $16,667 $3,194 $19,861 16 $733,333 $16,667 $3,125 $19,792 17 $716,667 $16,667 $3,056 $19,722 18 $700,000 $16,667 $2,986 $19,653 19 $683,333 $16,667 $2,917 $19,583 20 $666,667 $16,667 $2,847 $19,514 21 $650,000 $16,667 $2,778 $19,444 22 $633,333 $16,667 $2,708 $19,375 23 $616,667 $16,667 $2,639 $19,306 24 $600,000 $16,667 $2,569 $19,236 25 $583,333 $16,667 $2,500 $19,167 26 $566,667 $16,667 $2,431 $19,097 27 $550,000 $16,667 $2,361 $19,028 28 $533,333 $16,667 $2,292 $18,958 29 $516,667 $16,667 $2,222 $18,889 30 $500,000 $16,667 $2,153 $18,819 31 $483,333 $16,667 $2,083 $18,750 32 $466,667 $16,667 $2,014 $18,681 33 $450,000 $16,667 $1,944 $18,611 34 $433,333 $16,667 $1,875 $18,542 35 $416,667 $16,667 $1,806 $18,472 36 $400,000 $16,667 $1,736 $18,403 37 $383,333 $16,667 $1,667 $18,333 38 $366,667 $16,667 $1,597 $18,264 39 $350,000 $16,667 $1,528 $18,194 40 $333,333 $16,667 $1,458 $18,125 41 $316,667 $16,667 $1,389 $18,056 42 $300,000 $16,667 $1,319 $17,986 43 $283,333 $16,667 $1,250 $17,917 44 $266,667 $16,667 $1,181 $17,847 45 $250,000 $16,667 $1,111 $17,778 46 $233,333 $16,667 $1,042 $17,708 47 $216,667 $16,667 $972 $17,639 48 $200,000 $16,667 $903 $17,569 49 $183,333 $16,667 $833 $17,500 50 $166,667 $16,667 $764 $17,431 51 $150,000 $16,667 $694 $17,361 52 $133,333 $16,667 $625 $17,292 53 $116,667 $16,667 $556 $17,222 54 $100,000 $16,667 $486 $17,153 55 $83,333 $16,667 $417 $17,083 56 $66,667 $16,667 $347 $17,014 57 $50,000 $16,667 $278 $16,944 58 $33,333 $16,667 $208 $16,875 59 $16,667 $16,667 $139 $16,806 60 $0 $16,667 $69 $16,736 Total $127,083 $1,127,083
I'm not familiar with loans like this in the U.S. Anyone else? Do you have a link to a bank loan like this? I only see about a $5k difference between the two, so...
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
In a fixed principal or term loan as you list, what would extra payments even go towards... the balance, or just future payments? As in, you throw an extra $50k at it, does it just knock $50k off the balance that day, or does it go towards the next 5 or 6 payment paying both principal and the future interest?
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
I did a little Google searching for fixed principal loans and products and all I got was some definitions and calculators. So, it seems they are a thing. But, no ads or banks seem to be offering them. Granted, I only looked at page 1 of the search results.
Why are you asking about this? Do you have a loan like this?
Why are you asking about this? Do you have a loan like this?
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
I’ve personally never had a loan that was fixed principal.Clarice wrote: ↑Wed Nov 06, 2019 3:52 pm Thanks for the help, all. Probably could have been a little clearer in the product type I was referencing. Better off paying amortizing loan before a fixed principal loan it looks like.
To the poster who said fixed-principal products don't exist in the US - I doubt that as it is more beneficial for the consumer.
Code: Select all
AMORTIZING Rate 5% Term (months) 60 Period Balance Principal Interest Payment 0 $1,000,000 1 $985,295 $14,705 $4,167 $18,871 2 $970,530 $14,766 $4,105 $18,871 3 $955,702 $14,827 $4,044 $18,871 4 $940,813 $14,889 $3,982 $18,871 5 $925,862 $14,951 $3,920 $18,871 6 $910,848 $15,013 $3,858 $18,871 7 $895,772 $15,076 $3,795 $18,871 8 $880,634 $15,139 $3,732 $18,871 9 $865,432 $15,202 $3,669 $18,871 10 $850,166 $15,265 $3,606 $18,871 11 $834,837 $15,329 $3,542 $18,871 12 $819,445 $15,393 $3,478 $18,871 13 $803,988 $15,457 $3,414 $18,871 14 $788,467 $15,521 $3,350 $18,871 15 $772,881 $15,586 $3,285 $18,871 16 $757,230 $15,651 $3,220 $18,871 17 $741,514 $15,716 $3,155 $18,871 18 $725,732 $15,782 $3,090 $18,871 19 $709,885 $15,847 $3,024 $18,871 20 $693,971 $15,913 $2,958 $18,871 21 $677,992 $15,980 $2,892 $18,871 22 $661,945 $16,046 $2,825 $18,871 23 $645,832 $16,113 $2,758 $18,871 24 $629,652 $16,180 $2,691 $18,871 25 $613,404 $16,248 $2,624 $18,871 26 $597,089 $16,315 $2,556 $18,871 27 $580,706 $16,383 $2,488 $18,871 28 $564,254 $16,452 $2,420 $18,871 29 $547,734 $16,520 $2,351 $18,871 30 $531,145 $16,589 $2,282 $18,871 31 $514,487 $16,658 $2,213 $18,871 32 $497,759 $16,728 $2,144 $18,871 33 $480,962 $16,797 $2,074 $18,871 34 $464,095 $16,867 $2,004 $18,871 35 $447,157 $16,938 $1,934 $18,871 36 $430,149 $17,008 $1,863 $18,871 37 $413,070 $17,079 $1,792 $18,871 38 $395,920 $17,150 $1,721 $18,871 39 $378,698 $17,222 $1,650 $18,871 40 $361,405 $17,293 $1,578 $18,871 41 $344,040 $17,365 $1,506 $18,871 42 $326,602 $17,438 $1,433 $18,871 43 $309,092 $17,510 $1,361 $18,871 44 $291,508 $17,583 $1,288 $18,871 45 $273,852 $17,657 $1,215 $18,871 46 $256,121 $17,730 $1,141 $18,871 47 $238,317 $17,804 $1,067 $18,871 48 $220,439 $17,878 $993 $18,871 49 $202,486 $17,953 $918 $18,871 50 $184,459 $18,028 $844 $18,871 51 $166,356 $18,103 $769 $18,871 52 $148,178 $18,178 $693 $18,871 53 $129,924 $18,254 $617 $18,871 54 $111,594 $18,330 $541 $18,871 55 $93,188 $18,406 $465 $18,871 56 $74,705 $18,483 $388 $18,871 57 $56,145 $18,560 $311 $18,871 58 $37,508 $18,637 $234 $18,871 59 $18,793 $18,715 $156 $18,871 60 $0 $18,793 $78 $18,871 Total $132,274 $1,132,274
Code: Select all
FIXED PRINCIPAL Rate 5% Term (months) 60 Period Balance Principal Interest Payment 0 $1,000,000 1 $983,333 $16,667 $4,167 $20,833 2 $966,667 $16,667 $4,097 $20,764 3 $950,000 $16,667 $4,028 $20,694 4 $933,333 $16,667 $3,958 $20,625 5 $916,667 $16,667 $3,889 $20,556 6 $900,000 $16,667 $3,819 $20,486 7 $883,333 $16,667 $3,750 $20,417 8 $866,667 $16,667 $3,681 $20,347 9 $850,000 $16,667 $3,611 $20,278 10 $833,333 $16,667 $3,542 $20,208 11 $816,667 $16,667 $3,472 $20,139 12 $800,000 $16,667 $3,403 $20,069 13 $783,333 $16,667 $3,333 $20,000 14 $766,667 $16,667 $3,264 $19,931 15 $750,000 $16,667 $3,194 $19,861 16 $733,333 $16,667 $3,125 $19,792 17 $716,667 $16,667 $3,056 $19,722 18 $700,000 $16,667 $2,986 $19,653 19 $683,333 $16,667 $2,917 $19,583 20 $666,667 $16,667 $2,847 $19,514 21 $650,000 $16,667 $2,778 $19,444 22 $633,333 $16,667 $2,708 $19,375 23 $616,667 $16,667 $2,639 $19,306 24 $600,000 $16,667 $2,569 $19,236 25 $583,333 $16,667 $2,500 $19,167 26 $566,667 $16,667 $2,431 $19,097 27 $550,000 $16,667 $2,361 $19,028 28 $533,333 $16,667 $2,292 $18,958 29 $516,667 $16,667 $2,222 $18,889 30 $500,000 $16,667 $2,153 $18,819 31 $483,333 $16,667 $2,083 $18,750 32 $466,667 $16,667 $2,014 $18,681 33 $450,000 $16,667 $1,944 $18,611 34 $433,333 $16,667 $1,875 $18,542 35 $416,667 $16,667 $1,806 $18,472 36 $400,000 $16,667 $1,736 $18,403 37 $383,333 $16,667 $1,667 $18,333 38 $366,667 $16,667 $1,597 $18,264 39 $350,000 $16,667 $1,528 $18,194 40 $333,333 $16,667 $1,458 $18,125 41 $316,667 $16,667 $1,389 $18,056 42 $300,000 $16,667 $1,319 $17,986 43 $283,333 $16,667 $1,250 $17,917 44 $266,667 $16,667 $1,181 $17,847 45 $250,000 $16,667 $1,111 $17,778 46 $233,333 $16,667 $1,042 $17,708 47 $216,667 $16,667 $972 $17,639 48 $200,000 $16,667 $903 $17,569 49 $183,333 $16,667 $833 $17,500 50 $166,667 $16,667 $764 $17,431 51 $150,000 $16,667 $694 $17,361 52 $133,333 $16,667 $625 $17,292 53 $116,667 $16,667 $556 $17,222 54 $100,000 $16,667 $486 $17,153 55 $83,333 $16,667 $417 $17,083 56 $66,667 $16,667 $347 $17,014 57 $50,000 $16,667 $278 $16,944 58 $33,333 $16,667 $208 $16,875 59 $16,667 $16,667 $139 $16,806 60 $0 $16,667 $69 $16,736 Total $127,083 $1,127,083
If you have, I’d be interested in knowing what it was for.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
So all US consumer debt amortizes as I illustrated in the first option?
I’ve seen the second option with a small business loan. I think fixed principal might be common with floating interest rates.
I’ve seen the second option with a small business loan. I think fixed principal might be common with floating interest rates.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
The difference is driven by different cash flows, not "amortizing loan" vs. "fixed principal". So, here is my question to you: In the first loan you are paying $18,871 per month. In the second one you are initially paying 20,833 per month. To correctly evaluate the difference we need to equalize the cash flow and opportunity cost.
So, if you do take out loan #1, what are you going to do with the extra $1,962 in cash flow? The correct answer would be to apply that extra cash flow to pay down the principle.
On the flip side, if you take out loan #2, and when payments fall below that of loan #1 - where are you going to direct that extra cash flow? The correct answer - to keep apples to apples - would be back to a early pre-payment principle, and a reduction of interest charged.
So you would pay off both loans in the same time frame with the same amount of interest.
Like I suggested before, you need to look
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
The vast majority of debt, both personal or business. Any debt will "amortize" as you define it if they allow early payments of principle and interests is calculated off of the principle. Pre-payment penalties and interest charged under the "Rule of 78" makes things a bit more interesting and nuanced - but the principles still mostly hold.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
With loan #2 the extra cash flow begins with the second payment, not when payments fall below loan #1.alex_686 wrote: ↑Wed Nov 06, 2019 4:34 pm The difference is driven by different cash flows, not "amortizing loan" vs. "fixed principal". So, here is my question to you: In the first loan you are paying $18,871 per month. In the second one you are initially paying 20,833 per month. To correctly evaluate the difference we need to equalize the cash flow and opportunity cost.
So, if you do take out loan #1, what are you going to do with the extra $1,962 in cash flow? The correct answer would be to apply that extra cash flow to pay down the principle.
On the flip side, if you take out loan #2, and when payments fall below that of loan #1 - where are you going to direct that extra cash flow? The correct answer - to keep apples to apples - would be back to a early pre-payment principle, and a reduction of interest charged.
So you would pay off both loans in the same time frame with the same amount of interest.
Like I suggested before, you need to look
Regardless, your overall point still stands.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Understood. Thanks for the help. Although I won’t take on that endeavor.nolesrule wrote: ↑Wed Nov 06, 2019 5:02 pmWith loan #2 the extra cash flow begins with the second payment, not when payments fall below loan #1.alex_686 wrote: ↑Wed Nov 06, 2019 4:34 pm The difference is driven by different cash flows, not "amortizing loan" vs. "fixed principal". So, here is my question to you: In the first loan you are paying $18,871 per month. In the second one you are initially paying 20,833 per month. To correctly evaluate the difference we need to equalize the cash flow and opportunity cost.
So, if you do take out loan #1, what are you going to do with the extra $1,962 in cash flow? The correct answer would be to apply that extra cash flow to pay down the principle.
On the flip side, if you take out loan #2, and when payments fall below that of loan #1 - where are you going to direct that extra cash flow? The correct answer - to keep apples to apples - would be back to a early pre-payment principle, and a reduction of interest charged.
So you would pay off both loans in the same time frame with the same amount of interest.
Like I suggested before, you need to look
Regardless, your overall point still stands.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
When rates are equal, it is better to pay down the shorter-term loan, but only because this gives you more options.
Suppose that you have a one-year loan and a ten-year loan, both at 4%. If you pay $1000 against either loan, your balance next year will be $1040 lower. If you made that payment against the ten-year loan, you can't get at that $1040 until the loan is paid off; you will get $1480 in ten years. If you made the payment against the one-year loan, you can spend the $1040 savings when the loan is paid off, or invest it in something else, or use it to make an extra payment against the ten-year (now nine-year) loan to get the same $1480 as if you had paid it against that loan in the first place.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Thank you - understood.grabiner wrote: ↑Wed Nov 06, 2019 7:37 pmWhen rates are equal, it is better to pay down the shorter-term loan, but only because this gives you more options.
Suppose that you have a one-year loan and a ten-year loan, both at 4%. If you pay $1000 against either loan, your balance next year will be $1040 lower. If you made that payment against the ten-year loan, you can't get at that $1040 until the loan is paid off; you will get $1480 in ten years. If you made the payment against the one-year loan, you can spend the $1040 savings when the loan is paid off, or invest it in something else, or use it to make an extra payment against the ten-year (now nine-year) loan to get the same $1480 as if you had paid it against that loan in the first place.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
OP, Why are minimum monthly payments in your two examples different from each other? How did you come up with those payment schedules?
Could it be that one also has insurance premiums tacked on to it to insure you make your payments? (This is common when taking out a mortgage and you put down less than 20%.)
Could it be that one also has insurance premiums tacked on to it to insure you make your payments? (This is common when taking out a mortgage and you put down less than 20%.)
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Look up fixed principal loans. I was not familiar with them either. But, the principal payment is all that is fixed. As the balance goes down, so does the interest part of the payment, and also the monthly payment adjusts down with it. The monthly payment amount is not fixed.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Hey there, OP! This is a SUPER common misconception even among people who work in finance. I'm a private banker and do lots of mortgages and I didn't even grasp this until a few years into my career.Clarice wrote: ↑Thu Nov 07, 2019 6:32 amThank you - understood.grabiner wrote: ↑Wed Nov 06, 2019 7:37 pmWhen rates are equal, it is better to pay down the shorter-term loan, but only because this gives you more options.
Suppose that you have a one-year loan and a ten-year loan, both at 4%. If you pay $1000 against either loan, your balance next year will be $1040 lower. If you made that payment against the ten-year loan, you can't get at that $1040 until the loan is paid off; you will get $1480 in ten years. If you made the payment against the one-year loan, you can spend the $1040 savings when the loan is paid off, or invest it in something else, or use it to make an extra payment against the ten-year (now nine-year) loan to get the same $1480 as if you had paid it against that loan in the first place.
Lots of people say that "you pay more interest at the beginning of a mortgage than at the end" which is technically correct but only because the balance is bigger at the beginning! You do NOT "prepay" interest on a mortgage or amortizing loan. The amount of interest you pay is always exactly equal to the prior month's balance multiplied by your interest rate. The payment stays the same, but each month you pay a little less in interest and a little more in principal - because the balance is reducing, not because of some fancy math.
So let's say you have a $50,000 5 year car loan at 4%. The monthly payment would be $920.83.
And let's say you have a $50,000 30 year mortgage at 4%. The monthly payment would be $238.71.
You pay the EXACT SAME AMOUNT OF INTEREST - $166.67 - on these loans in month one, when the balance is the same ($50K).
The only difference is that you pay a lot more principal on the car loan because the amortization is so much shorter.
So the bottom line is that interest is interest.
HOWEVER I do want to add that there ARE other things to consider if you're debating which loan to pay down first besides interest rate. Lots of studies have suggested that paying down the smaller balances first (even if the rate is a bit higher) gets people out of debt faster. The reason is behavioral, not mathematical. Seeing quicker progress by wiping out an entire debt sooner is highly motivating and can encourage people to stick with their debt reduction plans. Plus it frees up monthly payments sooner. This is why I paid off my 0% car loan first even though I have a 5.125% rental mortgage. I wiped out a big monthly payment which impacts me today, versus putting $20k against a mortgage which would still be there with it's required monthly payment tomorrow. Mathematically that doesn't make sense, but personal finance is personal. It's not always JUST about the math.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Thank you, Meg.Meg77 wrote: ↑Thu Nov 07, 2019 10:22 amHey there, OP! This is a SUPER common misconception even among people who work in finance. I'm a private banker and do lots of mortgages and I didn't even grasp this until a few years into my career.Clarice wrote: ↑Thu Nov 07, 2019 6:32 amThank you - understood.grabiner wrote: ↑Wed Nov 06, 2019 7:37 pmWhen rates are equal, it is better to pay down the shorter-term loan, but only because this gives you more options.
Suppose that you have a one-year loan and a ten-year loan, both at 4%. If you pay $1000 against either loan, your balance next year will be $1040 lower. If you made that payment against the ten-year loan, you can't get at that $1040 until the loan is paid off; you will get $1480 in ten years. If you made the payment against the one-year loan, you can spend the $1040 savings when the loan is paid off, or invest it in something else, or use it to make an extra payment against the ten-year (now nine-year) loan to get the same $1480 as if you had paid it against that loan in the first place.
Lots of people say that "you pay more interest at the beginning of a mortgage than at the end" which is technically correct but only because the balance is bigger at the beginning! You do NOT "prepay" interest on a mortgage or amortizing loan. The amount of interest you pay is always exactly equal to the prior month's balance multiplied by your interest rate. The payment stays the same, but each month you pay a little less in interest and a little more in principal - because the balance is reducing, not because of some fancy math.
So let's say you have a $50,000 5 year car loan at 4%. The monthly payment would be $920.83.
And let's say you have a $50,000 30 year mortgage at 4%. The monthly payment would be $238.71.
You pay the EXACT SAME AMOUNT OF INTEREST - $166.67 - on these loans in month one, when the balance is the same ($50K).
The only difference is that you pay a lot more principal on the car loan because the amortization is so much shorter.
So the bottom line is that interest is interest.
HOWEVER I do want to add that there ARE other things to consider if you're debating which loan to pay down first besides interest rate. Lots of studies have suggested that paying down the smaller balances first (even if the rate is a bit higher) gets people out of debt faster. The reason is behavioral, not mathematical. Seeing quicker progress by wiping out an entire debt sooner is highly motivating and can encourage people to stick with their debt reduction plans. Plus it frees up monthly payments sooner. This is why I paid off my 0% car loan first even though I have a 5.125% rental mortgage. I wiped out a big monthly payment which impacts me today, versus putting $20k against a mortgage which would still be there with it's required monthly payment tomorrow. Mathematically that doesn't make sense, but personal finance is personal. It's not always JUST about the math.
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
I am in this business as well.Lots of people say that "you pay more interest at the beginning of a mortgage than at the end" which is technically correct but only because the balance is bigger at the beginning! You do NOT "prepay" interest on a mortgage or amortizing loan. The amount of interest you pay is always exactly equal to the prior month's balance multiplied by your interest rate. The payment stays the same, but each month you pay a little less in interest and a little more in principal - because the balance is reducing, not because of some fancy math.
In general, I agree. HOWEVER, there are many personal or consumer or auto loans where prepaid interest is charged on such loans. A "processing fee" charged on a loan with a credit union or bank is actually disclosed on the loan documents as a prepaid finance charge. Whenever there is a such disclosed prepaid finance charge - the Annual percentage rate disclosed is higher than the interest rate on the loan. Just one actual example of a short term (one year) loan given by a local credit union. The amount of such loans has to be $1,000 and for 12 months. The interest rate is 8.99% AND a 'fee' of $40 is charged at loan disbursement. That $40 is deducted from the $1,000. So, the borrower gets $960.00 in hand - but immediately has incurred a debt of $1,000. The loan documents show an APR (Annual Percentage Rate) much higher than 8.99 - depending on the date of the first payment due and the scheduled frequency of payments - the APR for these loans is in the 16.00 - 17.99% range. All this being said, if you already have one of these loans - the correct interest rate to look at is the 8.99% - the actual rate being charged/calculated whenever you make a payment.
Another "Boglehead" example analogous to someone asking what time it is -- and the answers received give detailed instructions on how to build a watch!
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Assuming you're referring to the two 5% 60-month loans listed in this post, Clarice, you do indeed save more interest dollars by paying extra toward the one with the fixed total payment (what I believe you call an "amortizing" loan) rather than the one with the fixed principal payment. Using your example, if you pay $100,000 to reduce each $1,000,000 loan to $900,000, you'd save $13,227 interest on the first loan; but only $12,708 on the second loan.
However, while the savings on the first loan are spread evenly over the 60 months, more savings on the second loan occur during the first 30 months than during the last 30. Because of this, the Internal Rate of Return (IRR) from paying an additional $100,000 is the same (5%) for both loans. In fact the IRR is 5% for all six cases: the original $1,000,000 amount, the reduced $900,000 amount and the $100,000 reduction for both loans. [*] (The formulas use the Excel IRR function.)
Code: Select all
Fixed Total Payment Loan
Interest IRR Formula
Original 132,274 5.00% =12*IRR(B10:B70)
Reduced 119,047 5.00% =12*IRR(D10:D70)
Savings 13,227 5.00% =12*IRR(F10:F70)
Fixed Principal Payment Loan
Interest IRR Formula
Original 127,083 5.00% =12*IRR(G10:G70)
Reduced 114,375 5.00% =12*IRR(I10:I70)
Savings 12,708 5.00% =12*IRR(K10:K70)
Code: Select all
Col A Col B Col D Col F Col G Col I Col K
------------------- C a s h F l o w s --------------------
---- Fixed Total Pmt Loan --- ---- Fixed Princ Pmt Loan ---
Row Mo Original Reduced Savings Original Reduced Savings
Code: Select all
10 0 (1,000,000) (900,000) (100,000) (1,000,000) (900,000) (100,000)
11 1 18,871 16,984 1,887 20,833 18,750 2,083
12 2 18,871 16,984 1,887 20,764 18,688 2,076
13 3 18,871 16,984 1,887 20,694 18,625 2,069
14 4 18,871 16,984 1,887 20,625 18,563 2,063
15 5 18,871 16,984 1,887 20,556 18,500 2,056
16 6 18,871 16,984 1,887 20,486 18,438 2,049
17 7 18,871 16,984 1,887 20,417 18,375 2,042
18 8 18,871 16,984 1,887 20,347 18,313 2,035
19 9 18,871 16,984 1,887 20,278 18,250 2,028
20 10 18,871 16,984 1,887 20,208 18,188 2,021
21 11 18,871 16,984 1,887 20,139 18,125 2,014
22 12 18,871 16,984 1,887 20,069 18,063 2,007
23 13 18,871 16,984 1,887 20,000 18,000 2,000
24 14 18,871 16,984 1,887 19,931 17,938 1,993
25 15 18,871 16,984 1,887 19,861 17,875 1,986
26 16 18,871 16,984 1,887 19,792 17,813 1,979
27 17 18,871 16,984 1,887 19,722 17,750 1,972
28 18 18,871 16,984 1,887 19,653 17,688 1,965
29 19 18,871 16,984 1,887 19,583 17,625 1,958
30 20 18,871 16,984 1,887 19,514 17,563 1,951
31 21 18,871 16,984 1,887 19,444 17,500 1,944
32 22 18,871 16,984 1,887 19,375 17,438 1,938
33 23 18,871 16,984 1,887 19,306 17,375 1,931
34 24 18,871 16,984 1,887 19,236 17,313 1,924
35 25 18,871 16,984 1,887 19,167 17,250 1,917
36 26 18,871 16,984 1,887 19,097 17,188 1,910
37 27 18,871 16,984 1,887 19,028 17,125 1,903
38 28 18,871 16,984 1,887 18,958 17,063 1,896
39 29 18,871 16,984 1,887 18,889 17,000 1,889
40 30 18,871 16,984 1,887 18,819 16,938 1,882
41 31 18,871 16,984 1,887 18,750 16,875 1,875
42 32 18,871 16,984 1,887 18,681 16,813 1,868
43 33 18,871 16,984 1,887 18,611 16,750 1,861
44 34 18,871 16,984 1,887 18,542 16,688 1,854
45 35 18,871 16,984 1,887 18,472 16,625 1,847
46 36 18,871 16,984 1,887 18,403 16,563 1,840
47 37 18,871 16,984 1,887 18,333 16,500 1,833
48 38 18,871 16,984 1,887 18,264 16,438 1,826
49 39 18,871 16,984 1,887 18,194 16,375 1,819
50 40 18,871 16,984 1,887 18,125 16,313 1,813
51 41 18,871 16,984 1,887 18,056 16,250 1,806
52 42 18,871 16,984 1,887 17,986 16,188 1,799
53 43 18,871 16,984 1,887 17,917 16,125 1,792
54 44 18,871 16,984 1,887 17,847 16,063 1,785
55 45 18,871 16,984 1,887 17,778 16,000 1,778
56 46 18,871 16,984 1,887 17,708 15,938 1,771
57 47 18,871 16,984 1,887 17,639 15,875 1,764
58 48 18,871 16,984 1,887 17,569 15,813 1,757
59 49 18,871 16,984 1,887 17,500 15,750 1,750
60 50 18,871 16,984 1,887 17,431 15,688 1,743
61 51 18,871 16,984 1,887 17,361 15,625 1,736
62 52 18,871 16,984 1,887 17,292 15,563 1,729
63 53 18,871 16,984 1,887 17,222 15,500 1,722
64 54 18,871 16,984 1,887 17,153 15,438 1,715
65 55 18,871 16,984 1,887 17,083 15,375 1,708
66 56 18,871 16,984 1,887 17,014 15,313 1,701
67 57 18,871 16,984 1,887 16,944 15,250 1,694
68 58 18,871 16,984 1,887 16,875 15,188 1,688
69 59 18,871 16,984 1,887 16,806 15,125 1,681
70 60 18,871 16,984 1,887 16,736 15,063 1,674
--------- --------- ------- --------- --------- -------
Total 1,132,274 1,019,047 113,227 1,127,083 1,014,375 112,708
mo 1-30 566,137 509,523 56,614 594,792 535,313 59,479
mo 31-60 566,137 509,523 56,614 532,292 479,063 53,229
Interest 132,274 119,047 13,227 127,083 114,375 12,708
Re: Is the effective interest rate of a loan higher when it’s early in amortization period?
Being "in this business" - I commonly encounter, otherwise very intelligent, folks who get really mixed up about such matters.
A common situation I ran into was folks who were choosing to pay extra principal regularly on their home mortgage, while - at the same time - carrying balances on their credit card accounts - sometimes large balances.
When I would ask why they would pay extra on, say, a 5% mortgage loan - and carry a credit card at, say, 18% - the answer they gave me was that the mortgage was a much longer term - while they hoped/expected to pay off the credit card balances in a much shorter time.
A common situation I ran into was folks who were choosing to pay extra principal regularly on their home mortgage, while - at the same time - carrying balances on their credit card accounts - sometimes large balances.
When I would ask why they would pay extra on, say, a 5% mortgage loan - and carry a credit card at, say, 18% - the answer they gave me was that the mortgage was a much longer term - while they hoped/expected to pay off the credit card balances in a much shorter time.