Daily Note

Thursday, April 23, 2009

Amortization Schedules and Principal Prepayment, Part 1: Shortening a 30-Year Mortgage Into 15

I’ve been tinkering around with my mortgage. Have you ever wondered how the monthly payment was determined? It’s called amortization. An amortization schedule is a way to make equal payments over a period of time, but have the payments split between principal and interest so that the interest paid over time decreases over time along with the loan amount remaining. It is a balancing act to be fair to both borrower and lender, and you can find a mathematical derivation here.

The most direct way to see where you are on your amortization schedule is to ask your lender to send you a copy. Alternatively, you can generate one yourself by using a mortgage calculator with this feature. Here is the amortization schedule for a $200,000 loan with a fixed interest rate of 5% over 30 years.

(May not be visible in RSS format. Here is the direct link.)

As you can see, in the beginning most of your payment goes towards interest, and only a little reduces your principal, or outstanding loan amount. As time goes on, your payment stays the same, but the chunk going towards interest decreases as the principal shrinks.

Mortgage Principal Prepayment
If you want to pay off the loan in less than 30 years, you’ll have to pay more than required. This is known as principal pre-payment. The effect of making such additional payments can be visualized by imagining that it moves you “ahead” in the amortizaton schedule.

Here’s an example using the schedule shown above. Let’s say you’re just getting ready to make your first payment of $1,074. At this rate, you still have 359 out of 360 monthly payments left to go! How much money would it take to shave off one extra payment off the end? To find that, you just have to look at the principal portion of Month #2, which I highlighted orange: $241.

If you pay $241 additional with your first payment now, you’ll won’t have to pay the $1,074 due on Month #360. Why is this? Working backwards, you can confirm that this is pretty much a 5% compounded return on $241 for 30 years, as expected. In addition, you’ll be shifted forward to Month #3 on the schedule. So next month your (still required) payment of $1,074 will have a bit more applied towards principal, and a bit less towards interest.

Making a 30-year Mortgage into a 15-year Mortgage
This actually creates an interesting way to shorten your mortgage. What if you kept paying the next month’s principal payment on top of your required $1,074 each month. You’d add on $241, then $243, then $245, and so on. Every month you’d shave off one month off the end, leaving you with a 15-year mortgage! You can also imagine this as skipping every other payment by just paying the principal and saving the interest.

This can work out nicely because the extra required will start out reasonably low at $241, and increase gradually with time along with your income and/or cashflow.

An alternative is to add $510 to every payment each month to shorten the term to 15 years. Although if you’re sure you want to do that, you might want to just get a 15-year fixed mortgage at a lower interest rate.

Wednesday, April 22, 2009

A Visit from Family

Pardon my hiatus– I was entertaining my sister and her family for a couple of days. It’s funny that the last post was about small, cool apartments– there’s nothing like having two toddlers and their parents visit to make you think that there is nothing cool at all about having a small apartment!

Other interesting lessons from this visit:

The value of a $500 stroller is questionable, but it’s especially useless for touring around Manhattan. The double-wide monstrosity my sister’s in-laws gave them is almost as big as one of those Smart cars, and much harder to park. If you’re going to be riding around on the subway, or want to actually enter any buildings, a cheap, lightweight folding stroller is a much better option.

And which would you think would be more expensive, a Polish coffee shop in Brooklyn Heights or a highly popular Italian restaurant in Times Square? Oddly, the bill was almost the same at both places, about $110-120 for 4 adults and 2 children, including tip. Carmine’s in Times Square seems expensive when you first look at the menu, but the family-style servings are so huge, it becomes an very good value, especially if you take home the leftovers, which were enough for another dinner for two, plus a small lunch for one.

All in all, the visit was great fun. I loved seeing how my niece and nephew reacted to their first subway ride, their first skyscrapers, seeing the Statue of Liberty from a rooftop, and visiting my office (which they did with just me, while their parents waited on the sidewalk outside with the too-large stroller). Although I was glad to get my apartment back, I was sorry to see them leave.

But then, an hour after they departed for the next phase of their vacation (3 days in Washington, DC, where the kids thought they’d be sleeping at the White House and petting the Obamas’ new dog), my mother called to see how things had gone. She then launched into a whole tirade about not understanding why they were spending money on this trip when they had so much debt. I suppose their justification was that the hotel in DC was “only $150 a night” and all the museums there were free.
My mother also dropped a bit of a bombshell: something may have been lost in translation, but apparently my sister told her she was unhappy that she couldn’t get her kids into a particular school system (she’s sort of on the line between two towns) and that they might have to move back to my parents’ home town for the schools there, and that my mother shouldn’t go too far with all the household projects she’s trying to tackle, because they might want things done differently if they end up taking over that house!

I’m really trying to give my sister the benefit of the doubt here, as she and my mother can have very conflicting versions of their arguments. But I certainly hope she’s not just waiting for my dad to die or be put into a nursing home so she can kick my mother out of the house and just take it over for herself! If that is her emergency fallback get-out-of-debt plan, it’s… it’s… I don’t know, just F***D UP!!!

You can see why there are so many family dramas relating to inheritances, etc. It just brings out the worst in everyone involved!

Podcasting Can Generate Profit

Make it interesting

Made interesting, pod casting can generate money so you don’t have to rely on short term loans. On the other hand, you will face fierce, cut throat competition from people with free podcasts. If you do decide to start a podcast, you should provide content that is informative, and has an expert's touch in order to stand out from the crowd.

A sponsor

What's even better is you could get a sponsor for your podcast, supplying direct payment, without a middle man.

Generate revenue

One of the newest ways to make money on the internet is through podcasting. To podcast for profit involves making and distributing podcasts in order to generate revenue. Podcast profits can be made through actually selling the podcast, but they are more likely to be generated through donations, sponsorship and advertising programs such as Google Adwords. Podcasting can be a great way to generate revenue, but that revenue will usually need to be generated in other ways than selling the podcast.

Make Money with Donations

It seems that the most popular way of making money through podcasts is by placing a donation button on the sidebar of your website or blog. Should a person want to donate to your cause, and though many people are unwilling to pay for a podcast, they might certainly be willing to voluntarily make a donation in order to keep the podcast going. This doesn't even have to be a large amount. ... click here to read the rest of the article titled "Podcasting Can Generate Profit"

Serve America Act Aims to Aid Nonprofits

Obama signs service bill

Red Cross

President Barack Obama today signed the Edward M. Kennedy Serve America Act. The bill greatly expands the AmeriCorps service program over the next eight years. It also creates more ways for students to make money for college and opportunities for people to serve their communities.

Nonprofits get help

The Red Cross praised Obama for signing the Serve America Act and a press release from the organization said:

This bill provides a welcome shot in the arm for non-profits, which are confronting a rapidly rising demand for assistance at a time when the economic downturn is making it ever more difficult to raise resources.

The Serve America Act encourages people to volunteer through organizations like the Red Cross.

More praise

The AARP also released a statement of support for teh Serve America Act, which said:

We know boomers and older Americans stand ready to, as AARP’s founder said, ‘create the good.’ In a survey conducted for AARP last year, millions of boomers and older Americans said that in the next five years, they want to increase their volunteer service to improve their communities and our world.

AARP also said the service opportunities created in the bill will help tackle specific national challenges. The organization is pleased that Americans older than 50 will now have more opportunities to serve.

Why Kennedy?

Obama’s Serve America Act is reminiscent of John F. Kennedy’s call to service, issued while he was president. Obama said:

I had always been inspired by the stories of the civil rights movement, and President Kennedy's call to service, and I knew I wanted to do my part to advance the cause of justice and equality. ... click here to read the rest of the article titled "Serve America Act Aims to Aid Nonprofits"

Smurfing Leads to New Laws | Iowa Waits for Money

Grant money not yet in use

Pseudoephedrine

Obama signed a $750,000 grant into the 2009 budget to help fight meth, and Iowa plans to use the money to prevent smurfing. Smurfing means buying pseudophedrine at multiple pharmacies to skirt the laws that limit the amount one person can purchase.

Iowa and several other states plan to implement an electronic tracking system to stop smurfing, which people do in order to be able to make methamphetamine. Now they just need the money.

Smurfing made easy by old system

Pharmacies currently do track the amount of pseudophedrine sold and who buys it. However, the pharmacists in Iowa have been using paper ledgers and writing down the information by hand. This method only ensures that people don’t exceed the monthly limit in purchases at one location.

Drug makers could get small short-term loans, purchase pseudophedrine at several pharmacies, and turn that money into a big profit by selling meth.

New system on the way

The new electronic tracking system will allow pharmacies to easily track how much product one person is buying at every pharmacy in the state. However, instead of not allowing the pharmacy to make an illegal sale, police will be notified after an illegal sale is made.

Tracking trend

Five other states already have systems similar to the one Iowa is planning to install and others are planning to do the same. Statistics show that meth-related arrests fell sharply after the law limiting the sale of pseudophedrine was passed. Police believe the new system in Iowa will get more drug dealers off the streets. ... click here to read the rest of the article titled "Smurfing Leads to New Laws | Iowa Waits for Money"

Tuesday, April 21, 2009

Banks May Face More TARP Hurdles

Treasury Secretary Timothy Geithner told a panel overseeing the Troubled Asset Relief Plan that regulators may want to keep banks in the program longer than the banks might wish. It depends in large part on how much credit banks make available to borrowers.

» E-Mail This » Add to Del.icio.us

China vs United States: A Visual Comparison

As we discussed in yesterday’s post, whether the United States and China like it or not, the economic futures of both countries are intertwined. Everyone knows that China’s got more people and that its importance as an economic superpower has escalated in recent years. What you might not understand is how the differences between our countries, in economic philosophy, in population, in geography and in how the military is built and paid for ultimately play into the entire economic relationship.

For many China remains something of a mystery. In order to help compare and contrast the economic differences, we have simplified the data from the CIA World Factbook. For the exact numbers in any category, check here.

For more personal finance visualizations see: WallStats.com