What Mortgage Amortization Depends On

Mortgage amortization depends most critically on interest rates, as fluctuations in rates can significantly impact the total cost of the loan, with a notable example being the 2008 housing market crisis where a sharp increase in interest rates led to a surge in mortgage defaults.

Key Dependencies

• Interest Rates — required to calculate the monthly payment amount, and a change in rates can affect the borrower's ability to afford the loan, as seen in the case of the 2008 housing market crisis where many subprime borrowers defaulted on their mortgages due to rising interest rates.
• Loan Amount — necessary to determine the total amount borrowed, and an incorrect loan amount can lead to an inaccurate amortization schedule, such as the case of the Wells Fargo fake accounts scandal where incorrect loan amounts led to improper mortgage approvals.
• Loan Term — needed to calculate the number of payments, and an incorrect loan term can result in an inaccurate amortization schedule, as seen in the case of the Goldman Sachs mortgage settlement where borrowers were sold mortgages with longer terms than they had agreed to.
• Payment Frequency — required to determine the number of payments per year, and an incorrect payment frequency can lead to an inaccurate amortization schedule, such as the case of the Bank of America mortgage servicing settlement where borrowers were incorrectly charged for monthly payments.
• Property Value — necessary to determine the loan-to-value ratio, and an incorrect property value can lead to an inaccurate assessment of the borrower's creditworthiness, as seen in the case of the AppraiserLoft scandal where inflated property values led to improper mortgage approvals.

Priority Order

The ranking of dependencies from most to least critical is as follows:

• Interest Rates, as they have the greatest impact on the total cost of the loan
• Loan Amount, as it directly affects the total amount borrowed
• Loan Term, as it determines the number of payments
• Payment Frequency, as it affects the number of payments per year
• Property Value, as it affects the loan-to-value ratio, but is less critical than the other dependencies

Common Gaps

People often overlook the assumption that interest rates will remain constant over the life of the loan, which can lead to a failure to account for potential interest rate fluctuations, such as the case of the 2008 housing market crisis where many borrowers were caught off guard by rising interest rates. Another common gap is the assumption that the loan term is fixed, which can lead to a failure to account for potential changes in the loan term, such as the case of the Goldman Sachs mortgage settlement where borrowers were sold mortgages with longer terms than they had agreed to.