http://www.sinceslicedbread.com/idea/14155
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Flawed Mortgage Formula
THE PROBLEM: the formula used to calculate mortgages harms the economy. HOW MY IDEA FIXES IT: Stepping the monthly payment amount on a mortgage by the expected annual inflation rate will keep housing more affordable but more importantly, stimulate the economy. HOW FIXING IT BENEFITS WORKING FAMILIES: Mortgage affordability will remain constant regardless of inflation which will also stimulate the economy.
Background: the standard mortgage formula is:
A = P(i)[(1+i)**N]/[(1+i)**N-1],
where A = the payment per month, P = amount borrowed, i = interest rate per month, N = number of months and (1+i)**N is the quantity (1+i) raised to the Nth power. The formula should be changed to:
A = P(i-g)[(1+i)**N]/[(1+i)**N - (1+g)**N)],
where g is the rate of increase in monthly payments and everything else is the same as above. Using i = 6% = 0.005, g = 3% = 0.0025, P = 100,000 and N = 360, the standard monthy payment is $599.55 while with the new formula, the monthly payment is $422.25 to start, increasing by 0.25% per month.