The Motley Fool Discussion Boards

Previous Page

Personal Finances / Buying or Selling a Home


Subject:  Re: Amortization: 30YR vs ARM Date:  2/6/2014  1:21 PM
Author:  Dwdonhoff Number:  126794 of 128887

Hi Crack'd,

Why does an ARM loan product initially amortize quicker than a 30YR fixed? Both loan products have a term of 30YRs and the amortization schedule will allow both loans to be paid to $0 after 30YRs. Yet the ARM loan will have it's balance reduce quicker than a 30YR fixed.

Actually, it doesn't... it doesn't matter whether the rate is fixed or adjustable, if the amortization period (the 'running track,' if you will) is the same, then the earlier amortization goes to whichever has the lower interest rate ('longer stride,' if you will... because the same amortized payment has more principal 'covering ground' on lower interest rates than higher interest rates.)

If you lay it out on a chart, though, the amortization advantage on the lower rate is simply earlier... but at a midway point the higher rate loan catches up. Remember, both are designed to cover the starting point to $0 finishing point at the 360 month run.

Dave Donhoff
Leverage Planner
Copyright 1996-2018 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us