Understanding amortization schedule when changing interest rates

sglauberman1

I have a loan that I gave to a friend to buy a house that I use Quicken to manage. When I set up the loan (amount $480,000, term 30 years, rate 4.25%) Quicken's calculations matched mine for the amount of each payment. I know want to reduce the interest rate I am charging my friend and when I entered the changed rate in the Loan Details page Quicken calculates a different payment amount going forward then I calculate plus it somehow shows the last payment amount to be almost double the regular payment amount. I am trying to figure out what is going on.

For a little more information, the Opening Date of the loan was 9/30/2018. There have been 11 payments made to date each in the amount of $2,361.31. Quicken shows the current principal balance at this time to be $472,595.40. When I adjust the rate to 3.75% it calculates a new payment of $2,222.95 with the last payment on 9/30/2048 to be $4,213.30.

If I start a new loan in Quicken with an opening date of 8/31/2019 such that the first payment will be due on 9/30/2019 and put the interest rate at 3.75% and a term of 349 months (that's the remaining months from the current loan) it calculates (as do I) a monthly payment amount of $2,226.13 with a last payment on 9/30/2048 as $2,217.05.

I am trying to understand the difference and what additional thing Quicken is looking at when I just adjust the rate versus creating a new loan with what I believe to be the exact same numbers (current principal, remaining term, same interest rate). Any help will be greatly appreciated. This is really bugging me. :)

sglauberman1

Update: I realized that when you change the interest rate on the Loan Details page, even though it says current rate, the new payment it calculates is based on the Original Loan Amount and the Original Term which isn't what I would expect. I'm not certain why that behavior would be useful at all especially when you have made prior payments.

NotACPA

I'd create a new loan account, with the new terms ... including the now shortened period (# of payments).

THEN, use the new loan to pay off the original loan.

sglauberman1

Thanks. I am going to have set up a new loan although this behavior changed in the last 5 years because I used to be able to change interest rates and have quicken calculate is properly.

Since this is a loan that I have I might just zero the balance on the original. Not certain what posting of the loan with the new one offers but I might be missing something.

Thanks again for responding.

Tom Young

@sglauberman1

"I am going to have set up a new loan although this behavior changed in the last 5 years..."

You may very well be correct.  I seem to remember that "back in the day" you could change an interest rate prospectively and have it work.

After setting up your "new" loan you can transfer the balance from the old loan Account to the new loan Account, and then delete Quicken's "Opening balance" entry.  That leaves a clean audit trail.