Friday, February 14, 2003 :::
Mortgage rates are almost low enough now that a recent entrant to the labor market might reasonably expect salary to grow at that rate. You could construct a mortgage, then, where the nth to last payment is just the balance left on the mortgage divided by n; the payment will then grow at the interest rate.
Now, for a thirty year mortgage the payments, for a little while, wouldn't cover the interest; to have a loan in "repayment" that's growing in nominal terms might make bankers nervous, but the principle can be generalized, if less elegantly: if inflation is likely to be 2% (if you think higher, you and I have an argument with the bond market), calculate the first payment based on an interest rate 2 points lower than you mean to assess, and carry on from there.
There was (is?) a form of mortgage that was (was) popular in Britain until recently in which the part of the payment that was supposed to go toward the principle instead went into an investment account; the balance on the loan per se was to be constant for the term, at the end of which the investment account would be used to pay off the principle, with the homeowner keeping the difference. A lot of people with principle coming due recently have found themselves with a problem. (I would think one could roll over such a thing; even if the account has only half of what's needed, that's a great down payment for a new mortgage, isn't it?)
::: posted by dWj at 10:19 AM
