What is the Effect of Amortizing a Bond on a Home Loan?
What is the effect of amortizing a bond? It is to pay down the principal. A lower payment today is called the discount rate. The discount rate indicates the percentage of interest that is reduced from the principal amount when it is paid. The lower the discount rate, the lower payments will be made over the life of the loan.
There are different ways of calculating the discount. One way is to add the interest rate and the amount of time it will take to earn that interest. The longer the time frame, the lower the discount will be. The other method of calculation is to add the amount of payments to the total of the payments. The discount rate is figured out by the following formula:
Yield Spread Premium – This is the markup of the mortgage rate by the lenders. They receive their commission when they sell the mortgage and the amount they charge is based on the amount they sell it for. Lender pays this markup to the seller. If the amount of principal owed to them is lower than what they sell it for, they will charge more. Therefore, the discount you receive from the lenders will reduce the amount you pay to the lender.
Capitalization – This is the extra amount a person will receive over the life of the loan. The capital will be divided between the amount of principal borrowed and the amount of interests. This is not treated as interest on the principal. However, if you pay the minimum required monthly payments on the principal, the interest will be taxable and you will gain taxable income.
Mortgage Service Release – This is also known as the PMI or Private Mortgage Insurance. In this process, the private insurance company that protects your mortgage pays the company that insures the home to make sure that the payments are made. The PMI premium will be lower than the other premiums on your loan. If you decide to remove your private mortgage insurance, you may reduce the amount of money you pay to the lender. This can decrease the discount you will receive on your loan.
The effects of amortizing your bond will depend on your ability to budget and how much you owe versus how much you are paying each month. It is usually the case that the more you owe, the less you will receive when you amortize. This is due to the lender having to cover costs associated with the loan such as the discount and loan origination fees. If you are able to manage your monthly payments and not overextend yourself financially, then you should consider amortizing your bond.
