Answer to Question #281055 in Finance for Aarti

Question

If you increase the interest rate on an amortized loan, does the payment increase or decrease? why increase or why decrease?

Answer 1

The principal portion of the payment increases

Adjustable-rate mortgages are an example of fully amortized loans with a variable interest rate (ARMs). The loan is re-amortized and a new amortization schedule is established each time the interest rate changes. As a result, you'll still be able to pay off the loan, but your future payments will be higher. The principle part of an amortized loan payment rises as the interest portion lowers. As a result, interest and principal payments have an inverse relationship during the life of the amortized loan.