What is the different between'Constant-amortized mortgage 'Constant-payment mortgage?

Answer 1

A constant payment mortgage (CPM) is what one would see as the standard or normal type of repayment system. Payments are equal (usually monthly), and the amortization of the loan is really slow. During the most of the repayment term, you will be paying mostly interest, and only a little bit of the principle.

Example:

$200000, for 30 years = 360 payments, at 6.% = .5% monthly interest rate (holding everything else constant)

If we wanted to find the monthly payment we would do the following:

200000 = C(((1-(1/1.005^360))/.005) where C is equal to the monthly payment

C = 200000/(((1-(1/1.005^360))/.005)

C = $1199.10

A constant amortization mortgage (CAM) is different from the CPM in that it pays a constant amortization. The payments will start off larger in the beginning but will decrease as time passes because the amount of interest paid decreases.

Example:

Using the same loan as above... 200000, 30 years, 6%

Finding the monthly payment takes two steps: the principle and the interest. The amount of principle paid will always be 2000000/360 = 555.56 for every single payment.

The interest is determined by the remaining balance of the loan. This first payment still has $200000 left on the loan so the interest will be 200000 * .005 = 1000.

The total payment for month 1 is 555.56 + 1000 = $1555.56

The second payment will have the remaining balance at 200000 - 555.56 = 199444.44 so the amount of interest paid for this second payment will be a little less. 199444.44 * .005 = $997.22