Calculating Adjustable Rate Mortgages
Date: 04/25/2002 at 08:31:59 From: Blair Dudley Subject: How to calculate adjustable rate mortgages I see much information on your site about calculating loans with fixed terms, but am unable to find anything about how mortgage payments are calculated when the term is variable. For instance, if I am applying for a loan of $200,000 with the rate of 5.875 using a 3/1 ARM (adjustable rate mortgage), how do I calculate the payment? Additionally, what will be owing on the loan at the close of the three-year term? Thanks for the help and I thoroughly enjoy the content of your page.
Date: 04/25/2002 at 10:19:06 From: Doctor Mitteldorf Subject: Re: How to calculate adjustable rate mortgages Dear Blair, Usually your initial payment amount is calculated based on the fiction that the loan will continue for 30 years with the same rate. In the case you describe, I'd guess the monthly payment would be figured at 1,183.08. At the end of 3 years, you would owe 191,994 (immediately after having made your 36th payment), and that amount would be re-amortized in a 27-year mortgage at a new rate. The re-amortization would be repeated each year thereafter. I've written a financial calculator that includes a screen for doing simple loans, from which the above numbers were taken. Another screen will allow you to play out possibilities for the adjustable rate and display amortization tables in which the rate changes in any way you specify. The program, which was once widely distributed as a commercial product under the name PerSense, is available for free download from my page on the Math Forum site: http://mathforum.org/~josh/ - Doctor Mitteldorf, The Math Forum http://mathforum.org/dr.math/
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