| This is brilliant. But I needed to go find out a better description for my luddite self Heres how using a bond backed mortgage causes the mortgage to become cheaper during interest rate rises ---- * How Interest Rates Affect Present Value * The interest rate is a key factor in calculating present value. A lower interest rate means future money is almost as good as money today because you can’t earn much interest. A higher interest rate means future money is worth a lot less because you could earn more interest with today’s money. * Example * 1. Initial Mortgage Calculation: - You have a $500,000 mortgage. - You are paying it back over 30 years with a fixed monthly payment of $2108. - The interest rate is 3%. 2. Interest Rate Change: - Suppose the interest rate goes up to 6%. 3. Impact on Present Value: When interest rates increase, the present value of those fixed monthly payments decreases. This is because if you were to invest money today at a 6% interest rate, you’d earn more on that investment than at 3%. Therefore, future payments are worth less because you’re missing out on that higher interest. |