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Coach
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Pray enlighten us oh wise sage!
I know - but I don’t want to do the work. I want the answers - I mean, to a certain extent, I know what the answer is… interest only beats amortized, hands down almost all the time, except when interest rates are super low, like sub 3%.
But motive is important, e.g., do you want to own your home outright (still doesn’t mean amortized) or is renting a better option (generally no as it’s paying someone else’s mortgage plus profit) or will you be moving in the next 3-5 yrs.
Stock market returns should not be factored in - they are not predictable vs loan rates that are generally fixed/known for a period of time.
Anyway, the math is something I’m not willing to spend time on right now… am interested to see how others react/respond.
I’ll ask GPT
Good luck! 😂 ChatGPT is on the struggle bus with this question. I have a job for a little longer. It has to calculate simple interest loan pay down schedule, amortized loan pay down schedule. Take the simple interest ending balance at each row requested in the schedule. Then it has to figure out at what interest rate would I pay to get the same principal pay down on the amortized loan. The question is designed to make people think about those early years of a house loan, why refinancing is bad, why net worth explodes without a mortgage. Banks don’t offer the refi to benefit you.
Coach
Basically what happens is they are very difficult to compare, your first year amortized loan pays off about 4k principal, it shifts more to principal over time slowly, simple interest pays off about 13.3k it’s a steady payoff of principal over time. ChatGPT understands how it works but can’t seem to model a comparison. It can model the efficiency of the loans.
Why it matters
You can negotiate an owner carry with simple interest in the contract, seller will accept it at 7-8% as the market cools. You pay down the mortgage initially 3x faster. Offer balloon payment in 3 years, as interest rates improve refinance, you have 3 years to time rates. You understand the difference, they don’t. 7-8% sounds good, it’s really good for you.
You know it’s a bad idea to reset that shift toward principal pay down as the loan matures. Realtors telling you date the rate marry the house don’t understand this. They think in terms of payments not payoff, poor people thinking.
As the efficiency of the loan increases with time you’ll suddenly get lots of refi offers to reset the loan to its least efficient point. Forever payments.
Real estate is really only a great investment when someone else pays that amortized payment. Real estate investing isn’t a primary home. You really count on appreciation or quick payoff to make anything after all costs considered. Recent appreciation isn’t normal.
The only plus is amortized payments are lower.
1yr comparison
Your math’s off. The IO payment is way higher than amortized. To prove your point, they need to be the same amount - because IO payments would be lower than amortized payment, so the difference would be the additional principal applied to the IO pmt to equalize it with the amortized.
You need to provide me with more details here because I’m not sold. In your model all you are doing is paying more. I can make extra principle payment on my amortized loan and end up the same place as your simple interest loan. My understanding is that the only difference between an amortized loan and simple interest is the compounding frequency and when payments are applied. I think that a monthly compounded simple interest loan is going to look just like an amortized loan if you assume payments are made on the first of each month.
Coach
It’s quite possible I’m not explaining it well. When people hear 7% interest on an amortized loan it’s not alarming. It should be it’s really an awful deal in the beginning of that loan. I found this article that covers the same topic. https://www.capitalone.com/cars/learn/getting-a-good-deal/simpleinterest-car-loans-what-you-need-to-know/2509