Mortgage abstract
A method for calculating a mortgage which provides application
of mortgage payments to principle first and then interest in the
amortization schedule of repayment of a conventional loan is disclosed.
The disclosure provides a method for calculating mortgage payments
on a conventional mortgage loan by applying such payments first
to reduction of principle while accumulating accrued interest. Payments
are applied towards accrued interest after the principle amount
of the loan is reduced.
Mortgage claims
What is claimed:
1. A method of implementing a fixed term loan repayment plan which
comprises:
determining an amount of loan principal to be provided;
calculating a repayment schedule based on a conventional loan amortization
table for a given interest rate, repayment term and the selected
principal amount;
providing a repayment schedule which applies such monthly payments
to repayment of principal due on said loan first;
accumulating interest payable and adding such to the principal
amount due; and
applying said term payments to reduction of interest due only after
the principal has been repaid.
2. A method of lending money which provides for a deferment of
interest received by the lender comprised substantially of the steps
of:
calculating a principal amount to be lent to a borrower; and
deciding a fixed monthly payment amount which will allow reduction
of the principal amount each payment period while applying each
payment to the reduction of principal of the loan only, calculating
monthly interest and carrying said amount forward in the principal
balance, and applying such term payments to interest only after
all the principal amounts of said loan have been paid first.
3. A method of lending money which provides for a deferment of
interest earned by the lender comprised substantially of the steps
of calculating a periodic payment which will be applied to the reduction
of the principal amount of such loan; calculating the periodic interest
on the balance of said principal and accruing and carrying the balance
of said accumulated periodic interest forward, and thereafter applying
any periodic payments on the loan towards reduction of said accumulated
interest only after the principal amount of said loan has been paid
down to zero.
4. A method of lending money, which provides for a deferment of
the repayment of interest, comprised substantially of applying all
periodic loan payments first toward reduction of only the principal
amount of the loan, and accumulating and deferring the payment of
any interest on the principal until the original principal balance
is substantially zero, and thereafter applying loan payments to
reduce the accumulated interest without compounding interest for
such accumulated and deferred interest amounts.
Mortgage description
FIELD OF THE INVENTION
The present invention relates to a new concept in home mortgages
or other investment type mortgages that include a plan which provides
a substantial reduction of the total amount of interest which is
paid over the life of the loan, for any given interest rate. The
method of the invention also provides for a rapid buildup of equity
as compared to the limited reduction of principal created by conventional
mortgage loans. The concept disclosed provides a means in which
a borrower may reduce loan principal due to the lender, at a faster
rate, under any given loan interest rate, by applying regular payments
to principal first, thereby substantially reducing the amount of
interest actually paid during the life of the loan.
BACKGROUND OF THE INVENTION
The economics and life styles of America are built on the basic
home mortgage, whether it be 15 year, 30 year or some other term
of repayment. Normally, and most conventionally, home mortgages
and other such loans are amortized using a formula which provides
that payments over the term of the loan are allocated to interest
first. In the later years of repayment, a significant portion of
the monthly loan payment, serves to reduce the principal due on
the loan.
Frequently, individuals or companies borrowing money on a conventional
loan basis resell or refinance the property which was acquired by
the use of the loan proceeds. Homeowners sometimes resell the house
they have purchased within five or ten years after the date they
acquired the property. At such a time, loan proceeds from a mortgage
used to acquire a residential property must be repaid from the funds
created at settlement of the property. Naturally, in a conventional
mortgage, most of the monthly payments provided to the financial
institution providing the funding are applied toward repayment of
interest, leaving very little to service the principal to reduce
same. Therefore, for many homeowners or business owners selling
their property or business, there is very little equity available
from the sale of the property during the early years of the life
of the loan.
A traditional mortgage allows affordable monthly payments over
a long term, and enables the mortgagor to build meaningful equity
only after many years of payments have been made. Combined with
rising real estate values and normal (or sometimes abnormal) inflation,
the mortgagor was able to create a modicum of wealth through the
accumulation of appreciation of the value of the property. However,
with inflation low and under control for quite some time, and with
stability of housing prices which reflects such low inflation, it
is more difficult for homeowners or business owners to create equity
in the property they're paying off, especially during the early
years of a conventionally amortized loan.
For a long time, the success of America was based on population
growth leading to housing booms, (i.e., more population growth),
in turn leading to more housing boomsall of which leads to more
mortgages being issued by financial institutions. Though interrupted
by wars, the cycles of business, and the insecurity of the stockmarket
and other investments, housing growth remains as one of the most
accurate measures of America's economic pulse. There have been numerous
kinds of mortgages used to facilitate the financing of real property,
but the most common provisions require the borrower to pay equal
periodic installments, which include an interest payment and a principal
payment, over a period of time until the mortgage was paid. The
premise of the agreement between lender and borrower is based on
a specific interest rate for a specific number of payments over
a specific term. This has been the backbone of the home mortgage
for some time, although when fluctuations in the interest rates
that banks offered caused new methods of interest calculations and
payments to be invented, such new methods give rise to new mortgage
"products" . Banks have instituted a variety of new mortgage
"products" such as the adjustable rate mortgage ("ARM")
which permits the rate, and therefore the borrower's payments, to
fluctuate, usually along with some other market instrument, to maintain
the bank's profitability. However, the conventional fixedrate mortgage
has remained the most popular loan. There is normally very little
equity in the homeowners property in the first five or ten years
of a 30 year amortized loan.
The present invention provides an alternate plan in which monthly
payments are made such as in an otherwise conventional mortgage,
in a simple, more reliable, mortgagorattractive mortgage plan.
This system gives the bank a new product to offer their investors
which can provide for rapid return of principal in which, in certain
scenarios, may be of interest to such a mortgage investor. At the
same time, and it provides a very attractive means to market mortgage
money to borrowers.
There is a certain category of investor, perhaps foreign investors
and other such special categories, in which the investor requires
a return of principal from an accounting point of view and a deferment
of interest received. By using the method described in the present
invention, such investors can defer receipt of interest payments
until a considerable time in the future, since the payments being
provided in the early years of the loan are applied to principal
only, with interest being accrued and deferred. Such investors are
simply recovering, therefore, principal that they have invested
and do not receive income by way of interest until later in the
loan payments schedule, or upon payment of the entire loan amount.
At such time, such an investor would receive any remaining principal
yet unpaid, along with accumulated interest which has accrued in
accordance with the present invention. There may be other categories
of investors which for, one reason or another, wish to refrain from
booking interest as income on investment loans until a later period
in time. By using the scheme described and illustrated, such investors
would not be receiving interest payments until considerably into
the life of the loan.
SUMMARY OF THE INVENTION
The present invention relates to a method for operating and implementing
a mortgage plan which comprises, determining an amount of mortgage
for which an applicant would qualify and a priority schedule of
repayment of principal based on otherwise conventional lending practices,
creating an accelerated payment schedule for the principal amount
of such mortgage so that the principal is repaid within a shorter
time than would otherwise be the case during a given term of the
mortgage, applying the entire amount of each payment to principal
first, while accumulating interest due. Thus, the total actual accumulated
interest paid on the principal of the loan is greatly reduced for
a given interest rate. Also, the amount of equity that the borrower
has in the property or business, being financed, increases much
faster than with what normally would be the case using a conventional
amortized schedule of repayments over a given loan or mortgage term.
Preferably, the accelerated equity payment schedule is created
by providing a monthly mortgage payment plan, and the equity buildup
in the loan is demonstrated by way of an amortized schedule illustrating
the principal paydown by application of payments to such principal
first. In this system and method, all paperwork in connection with
the mortgage plan is generated before the mortgage is implemented,
and computer means are utilized to operate and implement the mortgage
plan by providing a breakdown of the payment allocation using wellknown
arithmetic formulas.
The system of the invention includes the respective means to carry
out the previously described method steps. Preferably the means
for creating an accelerated principal payment schedule is a monthly
mortgage payment plan, and the accelerated equity accumulation and
reduced interest payment can be illustrated as shown in examples
disclosed with the present invention.
The accelerated principal payment schedule is a monthly mortgage
payment plan, and the investment vehicle for financial institutions
interested in offering such a program are those investors providing
mortgage money for placement which have a need to have a principal
return in their investment much faster than what arguably may be
possible in a conventional loan scenario. Also, since payment of
interest is fully deferred until all principal has been repaid,
income is not received by the lender until the time that all principal
is recovered. There are certain investment opportunities for financial
institutions providing mortgage money which are enhanced because
in such investors require return of principal much faster than normally
available and have deferred interest income which, in some scenarios,
may be desirable for many reasons.
BRIEF DESCRIPTION OF THE DRAWINGS
FIG. 1 is an illustrative table comparing essential parameters
in four different loan scenarios for purpose of comparison.
DETAILED DESCRIPTION OF THE INVENTION
The present invention includes a very specific methodology for
projecting fixed monthly payments over a specific term, while also
creating an equity accelerated loan, with amounts paid by the borrower
for repayment of the loan automatically applied to principal of
the loan first, as opposed to applying to interest payments in the
conventional fashion. Because there are fixed loan payments calculated
in the beginning of the loan, and since such loan payments are applied
entirely to principal first, there is less total interest paid over
the life of the loan for any given interest rate. Preferably, this
loan or mortgage will be a home loan for acquisition of the principal
residence so that the mortgagor can receive maximum benefits of
the equity thereby accrued in their home for return upon resale.
The loan product described may have certain marketing appeal for
financial institutions looking for a new type of mortgage to present
which has an attraction for borrowers. There are also categories
of investors which likely could benefit from such a deferment of
interest.
Turning now to FIG. 1, a comparison of the different loan examples
are shown by summarizing the parameters of four different schedules
of loan repayment. Each reference to an appendix is also equivalent
to the reference of the likenumbered example number. Appendix 1,
i.e. Example 1, is a conventional 30 year loan with an amortized
schedule of payments in the amount shown, for the interest rate
and the principal shown. In each column to the left in FIG. 1, the
parameters of the loans are labeled. The line labeled as amount
is the principal of the loan in each example. The interest rate
is the loan interest to be charged and accumulated, as described.
The monthly payment is selfexplanatory and as described in the
present disclosure. The term of the loan is the number of months
of payments until the loan is essentially paid to zero. The total
interest line is that amount of interest paid over the life of the
loan, allowing comparison of conventional loan interest in Appendix
1 with that as scheduled in the various examples otherwise illustrated
and appended. Below is described the details of each example.
The most common system for making required payments of a mortgage
is the monthly payment of principal and interest and applying principal
to the balance of the mortgage. Such a conventional mortgage requires
the payment of a fixed amount, each month, with a varying amount
being applied first to amortized interest and then the balance of
the payment to the remaining principal. For example, assuming a
conventional mortgage loan of $100,000, with interest set to 7%
per year, paid twelve times per year, the monthly mortgage payment
would be $665.30. This entails a conventional amortization schedule
such is that attached hereto as Appendix 1 for illustration, providing
a reduction of principal amount of $81.97 the first month, with
the first payment being also allocated to interest payments in the
amount of $583.33. The principal balance due on the loan is not
greatly reduced during the early years of the loan payment schedule.
As can be seen by the table, and is wellknown in the accounting
fields, the amount of the payments going to satisfaction of interest
is most of the payment, in the illustration being almost 90% in
the beginning.
The benefits of the present system are:
1. Total interest paid by the borrower to the lender over the life
of the loan is greatly reduced, for a given fixed interest rate;
2. After a relatively short term, equity buildup by immediate reduction
of principal, is very substantial;
3. The home equity available to the homeowner is radically increased
over a short term; and
4. The interest payments to the investor being delayed, in some
situations, can be a tactical advantage depending upon the needs
of such mortgage investor.
The bank or lender has the ability to place yet one more types
of investment in their portfolio of available options to such potential
mortgage investors. The benefits to the financial institution offering
these investment vehicles, or the benefit to the ultimate investor
who may be interested in such investment vehicles, include:
1. Providing an increased variety of available investment vehicles
to any type of mortgage investor or the shareholders of the bank;
2. The bank or financial institution has the ability to attract
an additional category of investor who has a financial or taxdriven
need to recover principal first and to defer the receipt of interest
which is income.
EXAMPLES
The appendices provided are examples of payments required under
the mortgage of the present invention as it would be calculated
under actual conditions. Loan Example 1 shown in Appendix 1 is a
conventional loan, showing a principal amount of $100,000 with an
interest rate of 7%. As can be seen, using conventional loan calculations
and amortizing the loan over 360 months (30 years), the payment
of principal interest would be fixed for each monthly payment period
in the amount of $665.30. The total amount of interest paid over
the life of the loan is $139,508.00. To use the method of the present
invention, the conventional loan calculation program allows the
user of a conventional personal computer to enter the amount of
the loan, the rate of the loan, the payment schedule and other parameters
of the loan. By providing a simple calculation that brings interest
forward and accumulated each month, payments can be first allocated
to principal using the same rate of payment which one would calculate
in the conventional loan scenario shown in Appendix 1.
Example 2 is an example which assumes a principal loan amount of
$100,000, with a payment period of 216 months, being 18 years. The
nominal annual interest rate is 7% and the loan payment per month
is $665.30. While the loan payment for each monthly period remains
the same over the life of the loan, it would be appreciated that
the full monthly payment is applied toward principal due until payment
number 150. At such a point, it can be seen that the principal of
the loan is almost entirely repaid. During payment in month 151,
while some of the payment is applied toward the balance of the principal
due to reduce it to zero, interest which has accrued on the balance
of the principal due begins to be repaid.
It will be appreciated that there is a table of interest accrued
shown in the Example, illustrating how interest is carried forward,
adding the interest due on the unpaid principal each month and simply
adding it so that the accrual of interest is carried forward and
payment of such interest begins much later in the life of the loan.
In Example 1, therefore, to make the loan attractive, understandable,
or just to enhance the comfort level that a consumer of loans may
have with this new approach, a conventional loan schedule may be
used and presented to the borrower so that they may compare their
payments and total interest paid with the new presentation shown
in Example 2. An average consumer of the loan will readily understand
that their payment is identical to a 30 year mortgage payment schedule,
but the term of the loan to pay off the entire balance has been
reduced to 216 months and that total interest paid over the life
of the loan is reduced to $43,704.00.
Appendix 3 is an example which shows a 360 month mortgage, the
30year mortgage frequently used by homeowners. The numbers used
to calculate this loan were based not on an equivalent of the monthly
payment as in Example 1 and Example 2, but rather the equivalent
of the term of payment over the conventional loan term in Example
1. The conventional loan term in the Example 1 shown in Appendix
1 is 360 months. Bringing this term into the calculation for Example
3 yields a monthly payment of $456.19. While this is a lower payment
than a conventional mortgage benchmark shown in Appendix 1, it will
also be noticed and appreciated by those skilled in this art that
there is an increase in the total balance due in the early part
of the loan life. While this particular product may be of advantage
to certain consumers ultimately, it will also be known to those
skilled in the art that consumers of loans do not, for psychological
reasons or other reasons, prefer loan products that actually increase
the amount due, even if only a temporary phenomenon caused by the
accounting which presents a loan reduction sequence as fully illustrated
in Example 3 attached as Appendix 3. The interest paid over the
life of the loan is greatly reduced over the conventional scenario,
showing a total amount of $64,228.00 interest. Using a principal
balance of the loan of $100,000 to start, with a nominal annual
interest rate of 7% compounded monthly, it will be appreciated that
each monthly payment of $456.19 is applied to principal first until
mortgage payment 219. At such time, accrued interest of $64,226.63
begins to be reduced through the balance of the paymentsassuming
that the loan has not been refinanced or repaid prior to such time.
In Example 4, shown in Appendix 4, the calculation of payments
is for a similar amount of principal, being $100,000. The life of
the loan is 257 months, with an interest rate of 7% as in the Example
before. The Example, once again, illustrates how interest is accrued
each month until payment 171. At such point, payments begin to paydown
the accrued interest. In Example 4 shown in Appendix 4, it will
be appreciated that the advantages of lower payments over a conventional
loan, without the disadvantage of negative amortization can be accomplished
by taking maximum interest which would accrue on the first payment
in Example 2, and provide that as the payment, in this case $583.33,
to be made each month. Running through the calculation using a conventional
computer program would thereby yield a term of 257 months and a
total interest to be paid over the life of such loan in Example
4 of $49,915.00. In both cases, Example 4 shows a loan scenario
and payment schedule in which the monthly payments are less than
the conventional loan schedule in Example 1, the term of the loan
is less, and the total interest paid is considerably less. At the
same time, the total due on the loan never increases. Therefore,
while any of the above methods work and provide savings to those
customers or clients of financial institutions that are interest
in the other advantages of deferred interest, the preferred method
would likely be that illustrated in either Example 2 or Example
4 as described above.
In the preferred embodiment of the present invention, a conventional
computer is used to implement the mortgage calculations shown in
the various examples. The inventor utilizes a particular product
known as "Timevalue software", which is a wellknown industry
product used for loan amortization and compound interest calculations.
One skilled in the art of calculating principal, interest and other
accounting variables will no doubt immediately identify a variety
of different sources that can be used to calculate the payments
and allocation of payments which would result from the implementation
of the principal reduction first plan described herein.
Although the invention has been described in terms of the preferred
embodiment and with particular examples that are used to illustrate
carrying out the principals of the invention, it would be appreciated
by those skilled in the art that other variations or adaptations
of the principal disclosed herein, could be adopted using the same
ideas taught herewith. Such applications and principals are considered
to be within the scope and spirit of the invention disclosed and
is otherwise described in the appended claims. Such adaptations
include use of different interest rates, terms, principal loan amounts
or other parameters.
