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I guess I could Google this and dig deeper into the numbers, but perhaps someone on the boards will chime in with an answer in plain english. I did ask 3 or 4 work colleagues, and no one had even given this any thought.

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.

In month one, more money goes toward principal vs interest with an ARM vs a Fixed rate, when both have 30 year terms. This continues in the early years of the mortgage. If you were to compare a 7YR ARM vs. a 30YR fixed, at the end of the ARM's fixed rate, (7 years or 84 months) the loan balance on the ARM is significanlty lower than the loan balance on a 30YR Fixed. Yet both loan products have 30YR amortization schedules?
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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.

Cheers,
Dave Donhoff
Leverage Planner
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it doesn't matter whether the rate is fixed or adjustable

Got it, it's the rate that drives the earlier loan balance reduction in the early years, not the loan product. Thanks.
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crackdclaw: "Why does an ARM loan product initially amortize quicker than a 30YR fixed?"

Assuming facts not in evidence. That statement is not true if the starting interest rate of the ARM is the same as the rate for the 30-year 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."

You are not controlling for the interest rate.

I am also not sure that you are controlling for the monthly payment amount.

What terms are you comparing.

For example, a $100k loan at 5% fixed for 30 years requires a PI payment of 536.82 and after 7 years will have a remaining balance of 87,945.18.

An 7-year ARM that starts at 5% will also require a PI payment of 536.82 and after 7 years will have a remaining balance of 87,945.18.

An 7-year ARM that starts at 4% will require a PI payment of 477.31 and after 7 years will have a remaining balance of 86,059.98.

Regards, JAFO
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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.) ~Dave

I have no idea what he just said--<grin>--but, crackdclaw, the amortization is the same during the fixed rate period of the ARM as the first five years of the 30 year FRM provided that the interest rates are the same.

But they wouldn't be the same, would they, because an ARM rate is lower than a 30 year FRM rate, which is why one selects an ARM to begin with.

Now if you're paying the ARM as if it were a 30 year FRM, then the ARM amortizes faster because more of the payment is going toward principal paydown.
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