Posted by Eduardo (OR) on November 14, 2000 at 20:13:20:
Jeff–
You ask an esoteric question. United States Rule is generally used for long term unvestments, in particular for mortgages. Under U.S. Rule the interest is computed each time a payment is made. In other words, in the United States, the payment period and the computational period for mortgage interest coincide (unlike mortgages in some other countries). If the payment is larger than the amount of the payment, the difference is used to reduce the principal. You never have a compound interest situation occuring where interest is computed on interest in amortized or interest-only mortgages. Only when the payment is less than interest-only. Thus, most mortgages are simple interest situations. U.S. Rule is generally contrasted with Merchant’s Rule. Merchant’s Rule is used in some business transactions for short term debt. The interest under Merchant’s Rule is computed differently and results in negligible differences when the term is short and the amounts are small. I suspect that your Normal Annual Rate (not a term in wide useage) is just another way of computing under the U.S. Rule if TValue gives you the same result, but I’m not sure about this as I don’t run TValue. Hope this helps. --Eduardo
I understand that
under US rule, interest is not computed on interest.
under Normal Annual Rate, interest is computed on interest.
But, when I enter 180 month ammortization, $55,0000 loan at 9% interest in TValue, I get pmt of $557.85 for both US Rule and Normal Annual Rate (compounded monthly).
This causes cognitive dissonance for me.
How can they both give the same payment?
Re: US Rule vs Normal Annual Rate & TValue - Posted by JPiper
Posted by JPiper on November 16, 2000 at 01:51:51:
My take on this is that these will be be identical except for certain circumstances. For example, assume the borrower pays late and does not include the late fee, or perhaps the borrower pays a small partial payment instead of the full payment. Under those circumstances it’s possible that the payment may not pay all of the interest due. Under “normal” this interest would be added to the principal balance of the loan, and therefore interest charged on this interest. Under US Rule the interest is not added to the loan, but is accrued, and paid with the proceeds of a subsequent payment.
With TValue the amortization schedule assumes that the payments will be received according to schedule and in the amount provided for. In practice this may not be the case, and therefore the way the loans amortize may vary. Your amortization schedules can’t reflect this until you know how the payments are received.