Wheatworks Blog: Financial Matters

All have heard the quote, “Those who fail to study history are doomed to repeat it.” The truth is, whether you study history or not, we’re all doomed to repeat it. There’s nothing new under the sun … including recessions and depressions.

And in each instance of recession or depression, it felt like the end of the world to some people. More importantly, after each recession and depression, life continued. The pendulum swung.

Wikipedia has a nice list of economic recessions in the United States. Read it, if you’re old enough you may remember quite a few of them. The National Bureau of Economic Research has identified 10 recessions which occurred between 1945 and 2007. And the Great Depression of the 1930’s wasn’t the first Great Depression. The “Long Depression” of 1873 to 1986 (23 years) was originally called the “Great Depression”.

My point? This isn’t the first recession. Nor will it be our last. Even if it becomes a financial depression, it will not be our first. Nor will it be our last. This is not the end of the world as we know it. History repeats itself. Good times follow bad follow good times follow bad …

Right now, it’s bad. Corporations beg Paulson and Congress for bailout money from taxpayers so they can continue doing what they’ve been doing poorly.

Middle class workers fear layoffs while corporate executives plan how they will spend their bonuses. But the sun still shines, the world still turns, and people are still people.

While the contrived prices of gold, stock shares, oil and currencies bounce irrationally, remember this: all things of true value hold their value.

It’s okay to turn off the news and spend time with your family and friends. Focus on what has lasting value. There is something true under the sun.

A search for “‘upside down’ mortgage” on Google returns 687,000 results. “housing crisis” returns 2,270,000 results.

In fact, housing news is so focused on the real estate bubble, that it’s difficult to find information about managing a mortgage loan responsibly. You’ll read more about home buyers walking away from their home than about paying off a mortgage early.

But suppose you didn’t buy more home than you can afford. Suppose, you’re like many homeowners and you can comfortably make your mortgage payments. Suppose, you even want to pay your mortgage off early.

How do you crunch the numbers? Use Real Estate Calculator Suite, a Windows-based collection of real estate and financial calculators designed to make financial math easy.

Making additional payments towards the principal of a loan is a great way to reduce the total amount of interest you will pay over the term of the loan. The Prepayment Calculator shows you the effects of making these prepayments (paying additional amounts to more quickly reduce the principal of your mortgage).

Here’s a quick example:

Amount Borrowed: $100,000
Interest Rate: 8.75%
Term in Months: 360
Annual Property Taxes: $1,200
Annual Insurance: $1,200
Annual PMI Payments: $600
Total Monthly PITI Payment: $1,036.70
Total Interest Over Term: $183,212.97
Total Interest and Principal: $283,212.97

Using the Prepayment Calculator to calculate the savings of adding an additional $100.00 to your monthly payment, you’ll find that you’ll shorten the term of your loan from 360 months to 238 months (save 10 years) and save a total of $72,330.29!

And you’ll save the time and money by simply adding an additional $100 to each monthly payment!

Here’s a screenshot of the Prepayment Calculator:

Learn more and download a free trial version at Wheatworks.com

This week I received a direct mail card from a national cash advance company. Everyone in my neighborhood, maybe even in my town, received it. It was addressed to “Current Resident”. (You may have received one, too.)

The mailer has two side-by-side photos. The first is of a black child in a doctor’s office. The doctor is checking the child’s throat with a tongue depressor. The text above this photo reads, “Needs a prescription.”

The photo beside it is a shot taken in a pharmacy. The pharmacist stands with his arms crossed in front of shelves filled with medications. The text above this second photo reads, “Not covered by your insurance.”

On the reverse side of the mailer is an invitation to “come in today and you can get up to $350 on the spot.” This flyer is from national cash advance chain which has a new office in my town.

The chain is owned by Advance America Cash Advance (AEA on the NYSE), a public corporation. It’s a large, international company. The investor relations information on the Advance America website reports “payday cash advances are small-denomination, unsecured advances that are typically due on the customers next payday.”

So how does a public corporation make money mailing payday loan junk mail?

The parent company, Advance America Cash Advance, offers a “How Much Is a Cash Advance?” calculator on their web site that makes it pretty clear. Simply choose your state, choose a loan amount from the drop down list, and you have your eyes opened.

In Louisiana, the online calculator indicates if someone borrows $100 and pays the $20 Fee (Assuming a 14-day term) the APR is 521.43%.

Who borrows at 521% APR? People who are desperate.

And the mailer I received appeals to desperation. People will do things for their children they wouldn’t do for themselves … like buy medications at 521.43% APR.

I stop by my local post office several times a week to retrieve mail from Post Office Box 7. (Someone asked recently how I managed to get POB 7. I asked for it and it was available.) The staff of the Ruston Post Office have always been helpful and friendly.

A couple of weeks ago my box held a bright yellow mailer from the United States Postal Service which advertised “eBay Day at the Ruston Post Office”. eBay Day was last week. From 10am to 1pm, customers learned the ins and outs of eBay and learned about “Quick, Easy, Convenient(tm)” online shipping options offered by the US Post Service. The first 100 participants received a coupon for three free listing fees on eBay.

Ruston has a really nice post office. And it’s always busy. It seems surprisingly so for a town our size. Folks gather and chat a bit while sorting their mail.

I usually sort Wheatworks’ mail before I leave the post office. I toss the junk mail into the convenient waste receptacles. I kept the eBay Day flyer because it struck me as an unusual effort by a government-related business to partner with a public corporation. (Of course, in light of the U.S. Government’s “investments” in insurance companies and banks lately, this shouldn’t seem odd.)

So why is the United States Post Office partnering with eBay?

Here’s what seems to be happening. The United State Postal Service is hurting like so many other businesses. According to an article available on the KSLA web site, the “Postal Service Looks to Cut 40,000 Jobs In First Layoff In History“.

The U.S. Postal Services has “lost 2 billion dollars”. It employs 685,000 people. According to the article by Jonathan McCall, Lavell Pepper with the post office in Shreveport, LA reports, “the preliminary numbers (40,000) look like it’s not going to be enough and we may have to do something else.”

If you’re interested in the financial report for the United States Postal Service, it’s available on their web site at: http://www.usps.com/history/anrpt07/highlights.htm

I may be reading those numbers incorrectly, but I think the $2 Billion dollar loss mentioned in the KSLA article is a bit low. The Net Loss for 2007 as reported by the USPS is more than $5 billion.

Perhaps that extra $3 Billion loss is why laying off 40,000 employees may not be enough to save the United States Postal Service.

However, with the way the U.S. Government has thrown money at private companies lately, it should not be too hard for the USPS to ask Uncle Sam for a few more billion. In 2007, taxpayers tossed $3 billion to the United States Postal Service as “capital contributions of U.S. government.”

J.P. Morgan Chase & Co. plans to help as many as 400,000 borrowers by modifying the terms of $70 billion in Option ARMS. 70 billion divided by 400,000 mortgages is $175,000 per mortgage. That’s a lot of help!

While this move by the bank may keep a large number of these borrowers in their homes, the bank is not doing this for charitable reasons. In fact, that JPMorgan Chase is making this move seems to indicate the bank has a negative view of our economic future. If the future were bright, I don’t believe the bank would be so willing to provide assistance to borrowers. No bank, no matter how large, wishes to own 400,000 homes.

Learn more in The Wall Street Journal article, “Massive Effort to Save Mortgages“.

I wrote yesterday about qualifying for a mortgage. The newspapers proclaim that “credit is frozen.” It is ironic then that lenders are feeling the heat. They were burned by a few years of loose lending.

Consequently, changes occurring in the mortgage lending industry will probably bring a return to more conservative lending practices. One of the former standard requirements in mortgage lending was a down payment.

Just a decade ago, it was common for lenders to require a 20% down payment for conventional, fixed rate mortgages. I expect down payments will become a standard requirement again. And the concept is simple.

Instead of lenders making loans that instantly put a borrower upside down in their mortgage, a down payment forces borrowers to have an instant 20% stake in their new home. From the lender’s perspective, this makes it less likely a home buyer will walk away from their mortgage.

If down payment requirements will be returning to mortgage lending, how does one determine how long it will take to accumulate enough of a down payment to purchase a home?

Real Estate Calculator Suite includes two Down Payment Savings Calculators. These two downpayment savings calculators will help you determine how much you will be able to save during a period of time and how much time it will take you to save a desired amount.

To determine how much you save during a particular period of time, choose the “How Much Can I Save?” calculator. First, enter your current savings balance and the amount you will save each month. Then, enter the intereset rate you’ll earn and the number of months you will save. The calculation results are displayed automatically.

Download Real Estate Calculator Suite and use it ten times for free to see if it works for you. If you like it, buy it for $39.95.

When the real estate market “woke up”, outlandish home prices had to come down because they weren’t based on real value. Rather, the over-pricing occurred because of greed which was at the root of much of the foolish lending and foolish borrowing of the last few years.

People say, “Real estate is local”. By that, they mean that what you experience in your neighborhood may be very different from what you see in the national news. Without a doubt, nationally, real estate has taken it on the chin and in the gut.

Because of this home prices have dropped significantly in many areas of the US. Some areas will continue to see home prices decline. In this bubble and its pop, lenders may have learned important lessons about loose credit. Home owners in some areas certainly have. And they’ve learned about the importance of affordability.

For years, one of the tips in Real Estate Calculator Suite has been this: “As tempting as it may be and even though you may qualify for a big loan, avoid buying more home than you can comfortably afford.” The temptation has been great in areas where home prices sky rocketed in recent years.

So, if prices are down in your neighborhood of the world and you plan on buying a new home, how do you know what “comfortably afford” means for you?

To my way of thinking, “comfortably afford” means a lot of things. It means that couples buy homes they can pay for even if one partner loses their job, wants to take off for children, or becomes disabled. It means there’s money left over for family fun. “Comfortably afford” means you don’t lay awake at night and thinking about how to stretch your budget.

Banks and mortgage lenders are returning to the concept of qualifying ratios: 28 for housing and 36 for debt.

If you want an easy way to see what safe lending standards indicate about the amount of home you can “comfortably afford,” use the Mortgage Qualifier in Real Estate Calculator Suite. It gives you a good idea of what you can expect to comfortably pay each month for your home. And it allows you to easily play with the numbers to see the effects of a pay raise or reduction in income.

Using the Mortgage Qualifier is easy. You enter your monthly income and your co-borrower’s monthly income, enter your monthly credit card, auto loan and other loan payments, and enter the amount you have available for a down payment.

As you enter your personal financial values, the calculator automatically updates the results to indicate how much you can comfortably afford.

The Mortgage Qualifier is one of 16 financial calculators in Real Estate Calculator Suite. It’s the one that will quickly get you in the home-buying ballpark in terms of what you can afford.

Learn more about Real Estate Calculator Suite or Download a Trial Version and play with your own numbers.

Of course, you can purchase Real Estate Calculator Suite for your Windows-based computer for only $39.95 USD.

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Some borrowers walk into a bank or credit union to borrow money and they have no clue. Those are the people who pay much more for the money they borrow than may be necessary.

Others scratch on the back of a napkin to play with loan numbers. Some create spreadsheets and crunch the numbers. These are those who understand spreadsheets. Depending on the spreadsheets they create, they have access to more information than the napkin scribblers have and a lot more information than those who borrow money without forethought.

Borrowing money costs money, so it’s important to be prepared to borrow money. A wise borrower considers everything before he or she talks to a lender.

Borrowing money is the opposite of saving. It is not a neutral act. Borrowing has significant consequences and carries risk. Here’s how wise borrowers do it.

1. Wise Borrowers Save Money.

Wise borrowers save money when they can and rarely carry enough debt to cause them stress. Because they know life holds so many financial dangers, (especially in the current economic environment) wise borrowers work to set aside a stash of money for emergencies. They are careful not to get caught without the ability to take care of the necessities for themselves and their family.

2. Wise Borrowers Protect Their Cash Flow.

Cash flow is the blood flow of your financial life. Without the flow of cash, your financial situation can quickly take a bad turn. Wise borrowers are disciplined enough to keep cash flowing throughout the month. What does this mean in simple terms? It means you constantly monitor you income and expenses to ensure you continuously have more income than expenses so that you have cash available before an expense arises. Don’t borrow so much the monthly payment does not fit nicely in your monthly budget.

3. Wise Borrowers Pay Cash When They Can.

It feels good to actually own an item you buy. If you can save $100 a month for five months to buy a new chair, do it. You’ll sit better knowing it’s actually yours. And you’ll walk out of the store knowing you saved money (no interest payments). And refuse to buy consumables on credit. If you don’t pay off your credit card each month and keep a running balance, the happy meal you get in the drive through will cost you big bucks before it’s paid off.

Now, if after considering 1, 2 and 3, you still wish to borrow money, do it with an understanding of the relationship of the interest rate to the total cost of your loan.

The easiest way I know to compare loans and financial options is to use LoanSpread Loan Comparison Calculator.

Anyone can compare 135 loans at once with LoanSpread by entering three loan variables and clicking a mouse. It’s literally that easy!

After using LoanSpread Loan Comparison Calculator to help you see the big picture of borrowing money, use it to drill down into the details of any of the 135 loans it displays to see the nitty-gritty. It will show you the real cost of a particular loan.

The beauty of LoanSpread is that after comparing loans and choosing one that makes sense for your budget, you can quickly create an amortization schedule and modify it to fit your situation. If you want to see the effects of adding an additional amount to a payment, you can do it quickly by entering the amount and clicking a mouse.

LoanSpread lets you switch between monthly and annual amortization schedules with a single mouse click. In fact, everything about LoanSpread is designed to make it easy to create and modify amortization schedules.

I invite you to download a fully functional evaluation version of LoanSpread. Explore it and try it out with your own financial question.

Then, if someone asks “how do you know so much about what different loans cost?”, you’ll answer, “I use LoanSpread!”

LoanSpread Loan Comparison Calculator

LoanSpread (http://www.loanspread.com) is a Windows-based, loan comparison calculator which compares 135 loans, displays the nitty-gritty details of any that you wish, and creates amortization schedules for those you wish to amortize. Download LoanSpread and see how it makes financial math easy!

The Library of Financial Equations at Math4Finance.com has grown this evening with the addition of the formula to calculate the present value of a growing annuity with continuous compounding.

Math4Finance.com is Wheatworks Software’s website for all things related to financial math.

And if you’re curious, here’s the formula:

Learn more at Math4Finance.com.