Reverse Compounding Loans
I heard that you can do a reverse compound on your residence loan and it will substantially lower the 30 year contract. Is this accurate? What is the formula for this?
Answer by Tom
What do you mean by “reverse compound”? In the days of sub-prime mortgages there were merchandise such as “option ARMs”. These were typically negative amortizing loans. For example, you might owe 5% interest on your loan but have a “teaser rate” where you only make annual payments equal to two% of your loan balance for a specific period of time. In that instance, because your payments are lower than your actual loan costs, your loan balance in fact increased in the course of the teaser period.
These days alternative ARMs are fundamentally non-existent. We’re basically back to a plain vanilla lending environment where 30 year fixed rate loans are most prevalent. Nearly all loans have no compounding effect because you are creating each principal and interest payments every single month. I’m not positive what formula you’re looking for, but any straightforward mortgage calculator ought to give you the answers you are looking for. I hope this helps.
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