Posted by brooke/ca on 4/20/07 12:42am
Msg #186069

OT question about how certain loans work..

If you have a



if you have a 10 year fixed/ARM. does the interest work the same way when you have a 30 year fixed P& I? In other words, when you are paying on a 30 year fixed, p& I , you're interest gets paid upfront and gradually decreases, and your principal increases. on a 10 interest only, that interest never works down, does it? Or am I missing something? Never thought about this until tonight when I was looking at a loan for brwrs that didn't want IO and LO was telling them that they could always pay extra Principle, but still, if you don't work down the interest for 10 years,,, help please!

Reply by Brooke Squyres on 4/20/07 12:44am
Msg #186070

PS just aking for my own knowledge, not explaining loans..TY n/m

Reply by MSFlorida on 4/20/07 9:37am
Msg #186089

Re: PS just aking for my own knowledge, not explaining loans..TY

Ok lets see if I can try. Interest only for 10 years you interest only payments would stay the
same because you are not paying anything to the Principal So you will always pay the same
payment for 10 years. But if you put extra towards principal every month then the Interest payment will go down everytime because you only pay interest on what you owe. The more
principal goes down the interest will adjust to what is owed on loan. OK if its rambling and you don't understand I apologize in hurry.

Reply by Bob_Chicago on 4/20/07 1:01am
Msg #186071

On a reguar fixed rate or ARM loan, a portion of each....

payment is interest computed on the outstanding prin amt and the excess over
that amnt reduces the prin. Thus the each subsequent payment requires less interst
because the prin bal has been reduced.
On a int only loan, you are only reqd to pay prin. Any excess amnt would
reduce prin. but if you made only the reqd interest pmt, then the prin bal would
remain the same.

Reply by Charles_Ca on 4/20/07 2:00am
Msg #186072

its late in Ca and much more so in Chicago...

I am sure that Bob meant that in an interest only loan the principle does no reduce unless you make a principle reduction payment. The ARM computes on the outstanding balance but depending on the terms of the ARM the interest rate can change. There is a number referred to as margin and an index number usually. The index is the value of money at a specific time and the margin is how much the lender charges for making the loan so if you have a LIBOR Index (London Interbank Exchange) for instance and the posted rate is 5% (for discussions sake) and the margin is 2% the borrower pays 7% on the loan. Depending on the terms, say the loan gets adjusted every 5 years and the posted rate goes up to 7% on the adjustment date the borrower would pay 9% both of course computed on the unpaid balance, the rate changes are not retroactive unlike some Presidents' tax rules.

Reply by Bob_Chicago on 4/20/07 8:23am
Msg #186082

Yeah and what Charles said also. All of those alfalfa .....

sprouts that you guys eat must keep you alert later than
our deep dish pizza.

Reply by Charles_Ca on 4/20/07 10:54am
Msg #186113

Believe me Bob I'd go for deep dish in a heartbeat but it

was past my bedtime and you're three hours later. I was up last night burning the midnight oil, I've been swamped with work and just breezed through Not Rot to get a change of scenery. I just wish that all these pizza companies on the west coast who call themselves Chicago-style pizza really knew what they were taliking about.

Reply by Brooke Squyres on 4/20/07 9:20am
Msg #186086

Thank you Bob and Charles, but I still am not clear..

the interest AMOUNT stays the the same for 10 years, right? it never gets whittled down (even if you are making extra principle payments) until the 10th year when the loan recasts with whatever the balance is and the going rate plus margin, right? Where with a 30 yr fixed, after awhile the interest part starts shrinking and you are paying more and more principle. Is that right? I feel a little stupid like I should know this, but I don't!

Reply by ReneeK_MI on 4/20/07 9:33am
Msg #186087

let's try again =)

on an I/O, you aren't required to pay any principle. If you never pay anything but the calculated "interest ONLY" payment - the principle is not changed. The interest payment is still calculated off the SAME balance each month, so THAT payment doesn't change.

Now, IF you were to pay extra along with your I/O payment, the extra would come off the principle. The next month, the interest is calculated off the remaining balance - since it has now CHANGED - the I/O payment would ALSO change. (Perhaps you'd have to do the extra payment more than once to even have an effect ... but the math concept is what I'm trying to explain.)

The only reason that the percentage of interest-to-principle changes monthly on a fixed-rate is because the principle balance changes every month - but you still make the same payment. Each month, the part of that payment that is deducted from the balance LOWERS the amount that the interest is calculated against.

I'm saying the same things Bob & Charles said ... just hoping it begins to fall into place for you? It's one of those things that you'll finally just 'see', and then not know how you didn't 'see' it before. =)

Reply by Gary_CA on 4/20/07 9:39am
Msg #186090

Third time's a charm...

Howdy Brooke...here ya have it from a hometown boy...

Those things have more movin' parts than a swiss watch, but here's the last one I saw.

5 years fixed 10 years I/O ARM... it goes something like this...

60 months interest only payments at the fixed rate... then rate goes adjustable.
60 more months interest only but now it's at whatever margin over LIBOR that's in the note.

20 years Principal and interest payments so that it will be paid off in full at the end of 30.

When you see these you'll notice that the payment goes through the roof after year 10... because now it has to be paid in 20 years.

Sometimes you'll see them with a balloon instead of the big payments, but not usually.... those are usually "40 due in 30" but that's a whole 'nother ball of wax.

Reply by Gary_CA on 4/20/07 9:42am
Msg #186091

PS... if you could stand to be in the room with a competitor

you could get a Nickle Burger on me... just for the pleasure of knowing you...

most of the poor souls that'll read this will live the whole retched life without even knowing what supreme pleasure they've missed by never having a Nickle Burger

No, I'm not that cheap, a nickle burger costs eight bucks. (and worth every penny)

Reply by Brooke Squyres on 4/20/07 9:55am
Msg #186095

Re: let's try again =)thanks, renee, I think I get it...

so you would actually pay MORE interest on a ten year fixed interest only because that principle isn't changing, even if you are paying "extra" on the principle each month, right? The thirty year fixed in the long run is a better deal interest wise, though you're payments may be a little higher. If I am wrong let me know. I sure appreciate the feedback!

Reply by John_NorCal on 4/20/07 10:02am
Msg #186098

Re: let's try again =)thanks, renee, I think I get it...

No that's not quite right. If you do pay extra towards the principal each payment, whether it's during the I/O period or during the regular amortization period, the principal will be reduced and the interest charged will be reduced.
Make sense now Brooke? Keep posting if it doesn't.

Reply by Brooke Squyres on 4/20/07 10:03am
Msg #186099

Re: let's try again =)thanks, renee, I think I get it... n/m

Reply by Brooke Squyres on 4/20/07 10:05am
Msg #186103

sorry don't know what happened..John....

but the interst is only reduced at the 10 year point based on the remaining principle, right? They don't recalculate youre interest each time you pay extra principle during the I/O period, do they? Boy, I'm feeling thick kthis morning.

Reply by Gary_CA on 4/20/07 10:11am
Msg #186106

John & I are saying they DO recalculate... but I'm not sure

on a regular I/O loan they do indeed recalculate the interest due...

but there's a lot of moving parts and fine print in the hybrids... maybe John has a better idea than me, I'm not sure on those particular products.

Reply by John_NorCal on 4/20/07 11:10am
Msg #186117

Re: sorry don't know what happened..John....

**They don't recalculate youre interest each time you pay extra principle during the I/O period, do they?**

Yes they do. Interest only payments are there so a person can control their money. If they plan to sell in 10 yrs, etc, then they might not care about reducing principal. But on the other hand if they want to pay more than the interest payment, then that extra will reduce the principal, and the interest will be recalculated based on the reduced principal.

Reply by Brooke Squyres on 4/20/07 10:03am
Msg #186100

Re: let's try again =)thanks, renee, I think I get it... n/m

Reply by Brooke Squyres on 4/20/07 10:03am
Msg #186101

Re: let's try again =)thanks, renee, I think I get it... n/m

Reply by Gary_CA on 4/20/07 10:08am
Msg #186104

I think just the opposite Brooke...

But that's a tough question...

On a 30 yr fixed every month a little more of your payment goes to principle and a little less to interest... we all know that.

What happens if you make extra payments???? USUALLY...

On a fixed it goes to principle, but the payments you keep making keep getting applied ACCORDING TO THE ORIGINAL AMORTIZATION... so even though you owe less you're still paying the same amount to interest... and they pick it up at the end. Your loan gets paid off quicker.

On an interest only the note says you must pay the outstanding interest, so it actually re-amortizes at least once a year, if not more so that more of your payment goes to the principal.

You end up paying much less and much quicker on an interest only if you have the discipline to actually pay more than you have to (most think they will but don't... same story with the Option ARMs).

Say you have a loan and the I/O payment is $1500 and the 30 year is $2000... what happens if you pay $2500?

On the 30 year an extra $500 goes to principal each and every month and long about year 20 or so you get a letter from the bank that says you're done, whoopee!!!

On the I/O $1000 goes to principal and now your interest payment is only $1499 so next month $1001 goes to principal... etc. Except that they may only recalculate every year... but they do recalculate it whereas on the 30 year fixed they don't.

My understanding explained to my by a true expert... I'm not the true expert, so verify this.

Gary

Reply by Brad/AZ on 4/20/07 3:01pm
Msg #186171

Do you all have this straight?

Just wondering. The program you're talking about sounds a little funky from the getgo. Are you refering to a 10/1 IO ARM, or a 30 year fixed IO for the first 10, or a 30 year ARM IO for the first 10? They are all different programs.

I have a 30 year fixed, IO for the first 10. Anything you would like to pay towards the principal will reduce the principal, thereby reducing the total amount of interest you will end up paying. Your monthly payments will not change until the 10 year mark, at which point you will begin paying Principal & Interest...this will be re-amortized based on the same fixed interest rate and the principal you have remaining at that time. Paying extra towards principal after that point will cause your calculated interest to be less, but it won't make a difference until the very end when you don't have to make as many payments because there won't be as much interest. Your monthly payments for the first 10 years will alway be the amount that was pre-determined when you signed your paperwork, and your payments for the last 20 years will always be the amount that was calculated at the 10 year mark, up until your last one which may be less if you were paying towards principal, or may even cut you a few payments short if you payed a lot towards principal.

Now if you're referring to a 10/1 IO ARM, that's a whole other program and I could explain that as well.