Borrower beware! (Student Loans)

Parents Forum
121

<p>calmom, says, "but it doesn't change the fact that the interest is calculated against the declining balance. "</p>

<p>That is correct up to a point.
You keep bringing up amortization tables from all different sources. In many cases of conforming loans, the loan is amortized only once... only at the time of closing. IF only once, then the lender will not and can not give you another updated amortization table if you make a payment above or below, the normal monthly payment. This is SOP.</p>

<p>In the paragraph above I said "In many cases, " which mean that there are exceptions to a conforming loan. What are they? A conforming loan lender does not have to reveal how the interest is calculated (GASP, clutch of heart) and it is the interest that we are concerned about, isn't it? By regulation, the only thing that a conforming lender has to do is to provide for the 4 boxes on top of your mortgage. How it gets the results for the 4 boxes, is the magic that the consumer doesn't understand! (Please, PLEASE, do not get too involved in this paragraph-it is very much philosophical. If you must then PLEASE make comments only after you do the primary reference reading)</p>

<p>In a simple interest loan, there is no boxes because there are far fewer rules. You may pay as much as you want, as often as you want and the loan will be REAMORTIED on receipt of payment. The two rules: The interest rate and be sure that you pay the accrued interest by the due date. Basically that's it.</p>

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<p>Calmom, please post the short blub on SIMPLE INTEREST METHOD. IT is very short, but extremely important.</p>

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<p>The 2nd and 3rd mortgages are also mostly conforming mortgages.</p>

<p>Unscruplous lenders? or ignorant borrowers?</p>

<p>There are some 2nd mortgages and refinanced mortgages that are simple interest loans. As I have been trying to impress upon all, simple interest loans are the easiest to understand, it is what you assume your home mortgage is doing, and pays off the fastest with the least amount of interest costs, IF you accelerate the loan. If you only pay the monthly amount, then the loan will be amortizd at like a conforming loan. If you are late in payments, you will pay more than a conforming loan.</p>

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<p>PLEASE do your own research. I may be wrong. The information and comments are my own and have been gathered by my own research and reading. Consult your Knowledgeable AND Competent person. Itstoomuch.</p>

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<p>Getting an initial amortization table is easy. That is not the issue. </p>

<p>Try getting a table after you make a $1.00 extra on your normal payment.</p>

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<p>Calmom: post #112. 3rd paragrph:
"However, I have now worked out this problem on half a dozen different amortization calculators - and they all yield the same result: if you prepay the 30 year loan by making monthly payments of the amount needed to make up the difference between the scheduled payments for 15 & 30 year loans, the end result in terms of principal and interest paid is equivalent. Why the math works out that way, I don't know.</p>

<p>There's a very good calculator with great visuals (charts) to show the effect of prepayments here:
<a href="http://www.partnersfirst.com/MortgLoanCalc.html%5B/url%5D"&gt;http://www.partnersfirst.com/MortgLoanCalc.html&lt;/a&gt;&lt;/p>

<p>COMMENT: "if you prepay the 30 year loan..." The link above, ... /mortgLoanCalc.html, " sets the conditions for the loan amortization. see the conditions that this calculator sets for prepayment, total interest, and total payments. Acording to this link you CANNOT prepay to use this chart!</p>

<p>the link's verbage follows:</p>

<p>Mortgage Loan Calculator</p>

<p>Use this calculator to generate an amortization schedule for your current mortgage. Quickly see how much interest you will pay and your principal balances. You can even determine the impact of any principal prepayments! Press the "View Report" button for a full yearly or monthly amortization schedule.</p>

<p>This Financial Calculator requires a Browser with Java Support</p>

<p>Definitions</p>

<p>Mortgage amount
Original or expected balance for your mortgage.</p>

<p>Interest rate
Annual interest rate for this mortgage.</p>

<p>Term in years
The number of years over which you will repay this loan. The most common mortgage terms are 15 years and 30 years.</p>

<p>Monthly payment
Monthly principal and interest payment (PI).</p>

<p>Total payments
Total of all monthly payments over the full term of the mortgage. This total payment amount assumes that there are no prepayments of principal.</p>

<p>Total interest
Total of all interest paid over the full term of the mortgage. This total interest amount assumes that there are no prepayments of principal.</p>

<p>Prepayment type
The frequency of prepayment. The options are: none, monthly, yearly, and one-time payment.</p>

<p>Prepayment amount
Amount that will be prepaid on your mortgage. This amount will be applied to the mortgage principal balance, based on the prepayment type.</p>

<p>Start with payment
This is the payment number that you prepayments will begin with. For a one time payment, this is the payment number that the single prepayment will be included in. All prepayments of principal are assumed to be received by your lender in time to be included in the following month's interest calculation. If you choose to prepay with a one-time payment for payment number ZERO, the prepayment is assume to happen before the first payment of the loan.</p>

<p>Savings
Total amount of interest you will save by prepaying your mortgage. </p>

<p>Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We can not and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.</p>

<p>COMMENT from itstoomuch: DO YOU SEE THAT THE CONDITIONS FOR A CONFORMING MORTGAGE IS VERY EXACT AND PRECISE. DID YOU SEE THIS VERBAGE IN YOUR MORTGAGE DOCUMENTS? I WOULD IMAGINE THAT HOME MORTGAGE IS CODIFIED IN YOUR STATE LAW. OURS IS. </p>

<p>Your comments as a lawyer?</p>

<p>Sorry for the caps. I don't know how to italize or bold this.</p>

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<p>PLEASE STRIKE POST #126. My logic is not clear. I meant to say that this table is not a conforming loan but a simple loan. Itstoomuch.</p>

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<p>You can create bold text by surrounding it with {b} and ending with {/b} (just substitute this style of bracket [] for the ones I used.) *See how I make bold ? *</p>

<p>Similarly, you can italicize by surrounding text with {i} and ending with {/i},again using [] brackets. So here is some text in italics</p>

<p>And if you want to get really fancy you can use both sets of brackets, *** and get bold italics all at the same time!!! ***</p>

<p>*Now go calculate your savings!!! *</p>

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<p>istoomuch - re post #122 --
Post your own blurbs. I'm not your research assistant. </p>

<p>I'm tired of doing the work of looking up things to either validate or refute your claims. </p>

<p>If you would post your links and references I might be more inclined to give what you say more credence.</p>

<p>As it is, you remain the least reliable source of information because when it comes down to it, you are some stranger on an internet bulletin board posting conclusions and opinions without supporting facts. </p>

<p>For what it's worth, I've spent at least an hour trying to validate your claim that some mortgages never reamoritize the loan with payments (SOP???) - and come up totally empty. If that exists anywhere, then there isn't a single consumer oriented web site that I can find that supports your claim. So if you know one -- please CITE it. And post a LINK.</p>

<p>A conforming loan has interest calculated against the declining balance; a simple interest loan also has interest calculated against the declining balance. BOTH will result in significant savings if you pay off early. The internet calculators concerning mortgage interest, that let see your potential savings, use the rules that apply to mortgages; there are also calculators for simple interest, which is generally what you use to see what happens when you pay more than the minimum due on credit cards. I found at least one online calculator that let you choose the method.</p>

<p>The differences are as follows:</p>

<p>With simple interest, the interest is calculated at a flat rate as a percentage of the total balance owed, as of the day the payment is credited to the account. Late charges are added the outstanding balance, and interest is calculated on those charges as well. You can probably save money on your credit card simply by sending the payment in early, such as the first of the month rather than the 20th.</p>

<p>On a mortgage loan, the interest is calculated as of the due date of the loan. It doesn't matter if you pay early or late -- you won't save money by paying on the 1st rather than the 20th. The interest is not calculated as a flat percentage - it is calculated using a specific formula. I posted a link to a site with the mathematical formula above. All of the mortgage interest calculators are using that formula. If you pay $5000 extra today on your mortgage, then as of NEXT month, the loan will be amortized based on the outstanding principal of X minus $5000. </p>

<p>It is a little more complicated than that, because mortgage interest is paid in arrears -- so your February mortgage payment pays the interest that was due in January. When you pay $5000 extra in February, the March bill will still include the interest that was due based on the principal used to calculate the February interest. Usually people only see the effect of this when refinancing and requesting payoff figures -- so your mortgage statement might show that you owe $75,000 - but then the payoff is $75,500 -- and you are thinking, how can the payoff be MORE than than the outstanding balance. But that's because the February mortgage statement only included January interest - to pay the whole thing off, you will need to pay the interest for February that was not yet billed as well.</p>

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<p>Quote from: Itstoomuch. When you look at the calculators you sourced and linked to; there is not enough information about the calculators, or the assumptions that the calculators and you make to have a high degree of confidence. That is why Chocoholic and I want you go forget the numbers, look at a different forrest, ignor the details and look at the overall scheme of things.
My response: SAY WHAT???</p>

<p>Itstoomuch: you have a very interesting perspective, and a weird mix of financial ignorance and/or naivite. Calmom has explained clearly several times how an amortization schedule works, and she and I have both addressed the benefits, and limitations of paying a mortgage off early. It ain't rocket science!!! A vanilla fixed rate mortgage has a clear schedule and you can hop down the schedule and save interest by paying the loan off early. Again, not rocket science.<br>
You say, " People prepay their mortgage because they assume that the loan is SIMPLE INTEREST." Nawwww. They don't. At least people I know don't. They pay their mortgages off early knowing that they are amortized loans because they DON'T want a mortgage. They want to own their house outright, or they want to increase their equity in their house. They, unlike you, understand the way an amortized loan works. They understand their ability to invest their money on their own, and decided that they would rather "invest" more in their house. You seem unable to believe that. Well, believe already. </p>

<p>And, BTW, when I asked you to cite sources, I mean to name the website, article, page, paragraph- not just tell us to link to a website and reserach. Research what? Just WHAT is it you think we don't understand? </p>

<p>Thanks Calmom, for your very clear and lucid explanation.</p>

131

<p>OK, hate to belabor the point, but I see where some of the confusion is coming from. In Post #101, Chocoholic posted
[quote]
I urge you to consider this carefully though, because I have closed a few times, and have always questioned and pressurized the lenders involved, in presenting every possible scenario, including paying a little extra every month, and every single lender that I used (Wells Fargo, GM, Merc.,Fleet etc) has said that the original amortization schedule would not be re-calculated, even though technically your principal was going down.

[/quote]

I should have read that a little more carefully the first time around -- Chocoholic is talking about CAR loans -- the lenders he mentions all finance auto purchases, NOT mortgages. </p>

<p>Car loans are NOT amortized like mortgages; they do NOT have "simple" interest - but rather many are calculated by something called the "Rule of 78s" which, unfortunately, I've never understood. (But naturally, someone else does and has taken the time to post an explanation on line; see: <a href="http://www.tiac.net/%7Emabaker/rule_of_78.html%5B/url%5D"&gt;http://www.tiac.net/~mabaker/rule_of_78.html&lt;/a&gt;)&lt;/p>

<p>When you get a car loan, the total interest is calculated as of the inception of the loan. Chocoholic is correct that there is no way to cut down the interest by adding extra to your car payment - at least one that is financed using this scheme. Basically, if you were to buy a car for $15,000 and your total interest was $5,000 -- you have now contracted to pay $20,000 for your car -- and nothing will reduce that -- UNLESS at some point you are ready to pay off the full balance of the car. That's when the "Rule of 78s" comes in -- you call the lender and ask for a payoff --and the figure you get generally results in your paying MORE interest because of the early payoff. </p>

<p>For a more detailed analysis, plus a list of states where this practice has been outlawed, go to:
<a href="http://www.bankrate.com/brm/news/auto/20010827a.asp%5B/url%5D"&gt;http://www.bankrate.com/brm/news/auto/20010827a.asp&lt;/a&gt;&lt;/p>

<p>In any case, this has absolutely nothing to do with home mortgages. It just explains where the confusion is coming from. There is no such thing as a home mortgage that is calculated with "simple interest" (unless it is a private note, common when one family member borrows the down payment from another in exchange for a promissory note). I mean - it can be done, but banks don't offer it. But car loans do come in both flavors... </p>

<p>As far as auto financing goes, I think it's better to avoid it, and only buy cars that you can afford to pay for up front, unless you are using a car for business purposes and are able to deduct lease payments or interest. (For the self employed, car leases and/or depreciation writeoffs on cars are a very nice little tax break)</p>

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<p>
[quote]
When you get a car loan, the total interest is calculated as of the inception of the loan. Chocoholic is correct that there is no way to cut down the interest by adding extra to your car payment - at least one that is financed using this scheme. Basically, if you were to buy a car for $15,000 and your total interest was $5,000 -- you have now contracted to pay $20,000 for your car -- and nothing will reduce that -- UNLESS at some point you are ready to pay off the full balance of the car.

[/quote]
</p>

<p>Wow! That's awful - and would explain the "loan and bank paranoia" of itstoomuch and chocoholic. I've only financed cars through credit unions, and have always paid them off by adding extra money to scheduled payment with no pre-payment penalty. I've never heard of a car loan like Chocoholics!!!! It sounds almost as bad as the interest-only arrangement that the OP, (7 long pages back) had. </p>

<p>This type of loan is something high school seniors should definitely be educated (and warned about) in their economics class.</p>

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<p>Calmom, you have done a great job.</p>

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<p>I agree. Thanks Calmom! (Are you related to Cal-EL, of superman fame????)</p>

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<p>alas. </p>

<p>just talk to your lender directly and ask the questions.</p>

<p>Lending institutions offer schedule and simple mortgages. You just need to be able recognize them. Simple mortgages are generally call "lines of credit," They are generally held by the bank. Scheduled mortgages are fannie mae/freddie mac type of mortgages and general resold in the secondary market.</p>

<p>The for lurkers to this thread... believe what you want. But you can see that there is a very heated debate. I have told you and given resources to prove to yourself to discover the true correct answer. I only suggest that you recognize that the loans that are on the market are calculated differently. Be sure that you understand how they are calculated so that you will not be in the position of the lawyer in post #1 article. The best way to directly answer your own situation is, Just talk to your lender, not your broker who is just the middleman.</p>

<p>be aware that rule of 78 is not legal in many states. Don't know why since payday loans have much higher APRs. </p>

<p>The cheapest loan is your credit card,
if you pay it off rapidly.
Simple interest loans are next cheapest if you habitually pay early and often, but get very expensive if you miss days or payments. FEEL type (PLUS, Staffords, Consolidate loans are simple interest.
Scheduled loans are scheduled once at closing, That is why is called schduled. It is best for those who need discipline and do not make extra additions to the loan. A your average home loan, car loan, private lender student loan are scheduled loans
Refinancing is more expensive than you think because you lose all the previous interest payments that were previously made. </p>

<p>Read very carefully what the our loan regulators have to say about loans.
<a href="http://www.phil.frb.org/consumers/establish.html%5B/url%5D"&gt;http://www.phil.frb.org/consumers/establish.html&lt;/a&gt;&lt;/p>

<p>Open up to other possibilties. When you recognize the difference you will understand. Let me know when you see the light.
BTW this is a MS level introduction to finance. IT gets more complicated when you get into "strips"</p>

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<p>You keep trying to insinuate that loans are some kind of mysticism which require an epiphany to understand, insulting the intelligence of those in this thread who took the time to actually explain the different types of loans and then went through the numbers to show what the differences are and why.</p>

<p>I think you should lay off the yoga and the new age music.</p>

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<p>itstoomuch, is this what you are trying to say:
You have a $300,000 home loan. You refinance after 2 years, with another 30 year loan. The interest you have paid during the first 2 years (which is most of your payment) is gone.
So, if during the first 2 years, your payment was $38,000, maybe only 2,000 was principal.
You still owe $298,000. Now you refinance the $298,000. Let's assume fees to refinance total 3,000. You have just paid off 2 years of your mortgage and owe more money than when you started. The 36,000 in interest you paid the first 2 years is gone. Instead of having a mortgage of $300,000 for 30 years, when you refinance, you end up with a mortgage of $300,000 plus refinancing fees for 32 years. You end up paying interest for 32 years instead of 30.</p>

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<p>istomuch wrote:
[quote]
Refinancing is more expensive than you think because you lose all the previous interest payments that were previously made.

[/quote]
So what, you get it back if you keep your old loan? Obviously not: the money you have already paid in interest is gone no matter what. When you refinance, your payoff will be based on outstanding principle and unpaid interest accrued through the date of payoff; you stop paying interest to lender #1 and you start paying interest to lender #2. If you were paying 7% interest to lender #1 and you are paying 5% interest to lender #2, then obviously you are going to come out ahead. </p>

<p>Refinancing can be expensive because you have to pay loan generation & closing costs (appraisal, title insurance, etc.); you may have to or choose to pay points; and obviously if you refi in a way that extends the loan (for example, take a new 30 year loan when you are 10 years into your old loan), you will pay more over time. Because of the expense of refinancing, some people with a fixed rate mortgage may be better off if they simply accellerate their mortgage by increasing the amount of payments - by adding to their monthly payment -- rather than refinance to get a lower interest rate. That is exactly the question that was raised here: is it better to refinance with a 15-year mortgage or simply start paying more into the 30 year mortgage?</p>

<p>Fortunately, it is very easy to figure out what to do, because reputable lenders will give you a statement as to closing costs when you apply for the loan. So all you have to do is add up the numbers and see what the refi vs. the existing loan will cost you over time. There are also calculators on the internet that allow you to plug in the closing costs + points and see the "breakeven" point - that is, when you will reach the point where you have saved more by refinancing than you would with staying with the old mortgage; this can often be several years out, so it's important to simply consider how long you plan to stay in the house.</p>

<p>You also need to take into account tax considerations -- for example, points are generally used to buy down the interest rate, and also they are generally tax deductible - so when you factor in the tax savings the net cost is somewhat less. (Someone earlier posted, incorrectly, that you should never pay points or that the best deals were no-point loans -- this simply is not the case if you are trying to lock in a low rate for a property that you expect to hold for a long time. You will pay more over the short term, but less over the long run, depending on how much the interest rate gets discounted).

[quote]
Simple mortgages are generally call "lines of credit,"

[/quote]
A home equity line of credit (HELOC) is not an amortized mortgage, because generally the monthly payment is NOT enough to pay it down during the term of the loan. Thus if you take a 10-year HELOC and only pay the minimum due, at the end of 10 years you will owe the bank a balloon payment. It is ALWAYS better to try to pay down a HELOC as rapidly as possible, because basically the HELOC is the same as a credit card -- your minimum payment is never enough to make a significant dent in principle.</p>

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<p>Calmom, I guess the question about refinancing comes more into play when you have a 5 3/4 mortgage and rates drop to 5 3/8. I know many people that refinance this. I haven't seen the numbers, but with refinancing costs and adding years to the loan, I am not sure refinancing is worth it.</p>

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<p>Just adding my thanks to calmom for all her work and help....extremely useful stuff!</p>