Yes and no. A lot of people have gaps in their financial education.
That said, mortgages aren't rocket science.
1. Assume at the end of the day you want the homeowner to be paying a stable monthly amount*.
2. In order to get there, you have {loan term}, {interest rate}, and {loan amount} as primary variables.
3. Assuming {loan term} and {interest rate} are constant (in a given mortgage market, at a given time), that leaves {loan amount} as the only variable.
So how do you get a constant monthly payment for a variety of {loan amounts}?
4. You add up all the interest that would be owed over the entire {loan term}, using {interest rate}, then divide each monthly payment into some proportion of {interest payment} and {principle payment}.
5. You also front-weight the interest payments, because at that time there's more outstanding total loan (versus at the end of the loan term, when only a little principle remains to be paid back).* *
Not super complicated. Yes, there's compound math, but conceptually simple.
* For some definition of stable, even if it readjusts on some schedule
* * Point in time interest pricing like this also makes future recalculation for over/underpayments easier, as you're essentially trued-up on interest payments at all times
alt Hacker News
Yes and no. A lot of people have gaps in their financial education.
That said, mortgages aren't rocket science.
1. Assume at the end of the day you want the homeowner to be paying a stable monthly amount*.
2. In order to get there, you have {loan term}, {interest rate}, and {loan amount} as primary variables.
3. Assuming {loan term} and {interest rate} are constant (in a given mortgage market, at a given time), that leaves {loan amount} as the only variable.
So how do you get a constant monthly payment for a variety of {loan amounts}?
4. You add up all the interest that would be owed over the entire {loan term}, using {interest rate}, then divide each monthly payment into some proportion of {interest payment} and {principle payment}.
5. You also front-weight the interest payments, because at that time there's more outstanding total loan (versus at the end of the loan term, when only a little principle remains to be paid back).* *
Not super complicated. Yes, there's compound math, but conceptually simple.
* For some definition of stable, even if it readjusts on some schedule
* * Point in time interest pricing like this also makes future recalculation for over/underpayments easier, as you're essentially trued-up on interest payments at all times