Re: mathematics of mortgages
On Nov 27, 2006, at 12:06 PM, joanna wrote:
There’s something I am confused about… I read in the papers that
some people’s ARMs will grow by leaps and bounds next year, but
interest rates have only moved up, oh, 3% or so. Why would that
make such a big difference?
The recent low in fixed 30-year mortgage rates in the US was in 6/03,
5.23%. The recent high was 6.76% in 7/06. For a plain vanilla
mortgage, the monthly payments, respectively, would be $1,652.90 and
$1,947.79, a difference of $294.89, an 18% increase. Not leaps and
bounds, but not trivial either. But you may be thinking of the
“negative amortization” mortgage, in which the first year or two’s
payments don’t even cover the interest (with the deficiency being
tacked onto principal). At a teaser rate of 3%, the monthly payment
would be $1,264.81. If that reset to a 6.76% market rate, the
increase would be $682.98, or over 50% - not including the increase
in principal because of the deferred interest payments. That would
probably bring the monthly payment over $2,000, for an increase of
over 60%.
There seems to be a lot of refinancing of these teaser loans underway
now, so the shock might be contained.
Doug