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Tuesday, July 22, 2014

Personal Debt & Amortized Calculator Fun

For today's posting, we decided to play around with numbers and calculators..

Specifically an amortized calculator which is the kind used to figure out bank loans and mortgage.

Most people really have no clue how much interest they end up paying when they borrow or as they're trying to pay down a credit card or what a difference a small increase in the minimal payment can make..

So we will use the example of a person buying a home and taking out at this moment a $200k mortgage at a fixed rate of 4.15% over 30 years

Based on the following, this individual will be paying $972.21 for the next 360 months and when the final payment is submitted in June, 2044, the bank will have collected $149,994 in interest off the home buyer in addition to the original $200k lent.
OK.. Now..

Let us say the person wants to add a mere $10 monthly to his minimum so that he/she is submitting $982.21 every time..  Does that make any difference?  Does it save any real money later on?

Based on this example using the amortized calculator, that $10 every month means the home will be fully paid off in December, 2043..  That's 6 months ahead of time!

In addition, the total interest the bank receives based on that minimal addition to the minimum payment is $146,541     That $10 monthly saved the home buyer $3,400 vs simply paying the bare minimum

Now the reason for the housing mess which triggered the 2008 market crash was because many of the mortgages were given to home buyers with teaser rates.
In other words, they weren't fixed mortgages but rather the broker would show the home buyer that current interest rates were at say 1.9% and imply if they ever did go up, it would be so minimally the buyer wouldn't even notice..

So what happened was as interest rates went up as is normal, so did the rate of interest for these mortgages, and while many could handle their payments at 1.9%, they couldn't manage their debt load at 5% and up..

So once again we use the example of a $200k home mortgaged for 30 years except now to start, the interest will be the teaser rate of 1.9%

Based on those figures, the minimum monthly payment would be $729.28 which as one can see is $250 a month less than based on paying 4.15% interest
So what happened back in the last decade is people budgeted based on this $729 staying somewhat constant and assumption if interest rates rose to maybe 2%, wages would too, or someone would get a 2nd job..

Whatever needed to be done to make the payments on time..

Then the rates spiked and 1.9% turned into 2.9 then 5.9%

So let's work out the math..

A homeowner is paying $729 monthly for 3 years and then by month 37, the interest rate spikes to 5.9%..  What is he/she now paying?
Before the figures are computed, one must remember this isn't based on 200k because its being slowly paid down for the past 3 years..    The new principal the 5.9% is attached to is  $184,726

Even with that smaller principal to work off of, the monthly payment skyrockets..

The new monthly payment is now $1,141.16, an increase of more than $400 monthly..

So you can see how so many people went belly-up..

The soulless media like to trumpet this lie that the people who were approved were those who under normal circumstances wouldn't have been accepted and other excuses to blame the victim..
We'd like to see how many people with pristine credit and good paying jobs could survive if their mortgage payment suddenly spiked like that

The only homeowners that were truly to blame and deserved to lose everything in this world were the house flippers who got a little bit too clever-clever and spread themselves very thin..

And when the interest rose and they couldn't flip quickly, they defaulted then went bankrupt.  Many fully protecting themselves from their home and possessions taken by incorporating themselves at the beginning

And in the last 6+ years the Fed has done everything humanly possible including spending Trillions of dollars via bailouts of banks, Freddie & Fannie Mae and inflating the stock market with the goal of resetting everything back to 2002
So of course people will buy and sell and flip again..

One last math example and we'll make this more the focus of credit card debt..

A person has a card and owes $6500 at 17.9% interest.. His/her goal is to pay it all off in 36 months..

This means every month the card payment will be $235  (**If that $6,500 could have been paid at once, $1,945 in interest over 3 yrs would have been saved)

Problem here is he/she is still getting killed with the high interest..
But let's say that person was able to transfer that $6500 to a card where the interest was $14.9% with a $50 charge to transfer, how much would he/she save ultimately?

The new balance here will be $6550..

Based on 14.9% interests, with the same $235 payment being made, not only is the debt paid off in 35 months instead of 36, but here, the interest comes to $1567 meaning you saved about $400 just by switching cards even with the transfer charge..
The lesson:  Obviously avoid getting into debt as much as humanly possible but if it can't be avoided, position yourself to get the lowest interest possible while paying as much over the minimum as one can..

And when it comes to mortgages, always lock the rate in.  Even if its very high and ultimately goes down, you can always re-finance but at least you know exactly what you're paying monthly with no surprises..