Learnt something new about amortization

When comparing 2 loans for the same amount and same amortization, but with 2 different interest rates, I used to think that the difference of the amortized payment would be about the same as the difference on an interest only payment. It’s not.

Example: $100k loan, with 5% vs 5.5% interest.

Interest only payments:
5%: $416
5.5%: $458
0.5%: $42 , which is the difference between the 2 numbers above

Same 2 loans, but 30 year amortized payments::
5%: $537
5.5%: $568 … the difference is not $42, but $31

The difference gets smaller the shorter the amortization period is, e.g. for 15yr term, the difference on $100k is only $26/mo.

When you look at the full amortization table, it becomes sort of clear. Well, sort of.

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I actually thought the difference in the amortized loan would be larger. Turns out it’s smaller…

If you compare 0% and 5.5%, it would make it clear. At 0%, you still need to pay a sizable principal monthly payment even though you’d pay 0 if interest only.

Basically you pay more principal in amortized payment with lower rate, thus the difference is smaller

Non-linear and exponential can make your brain hurt

That’s the part that I had not realized before. You summed it up concisely.

I used to think that the 1st payment’s principal portion would be the same regardless of the interest rate. It’s not.