Nora, I hadn't heard of porting a loan, which seems to mean transferring your loan to another property. Is this something done in Canada?
I found this article about portable mortgages offered by Etrade in the Real Estate Journal (2003) and it looks like the company still offers such a loan.
Great post. David Bach is one of my all time favorite motivational speakers and writers. His simple interpretations to investing goes a long away. I also recommend his books.
I was just discussing this topic with a friend of mine and we were trying to figure out a way to get around this "front-loaded" loan concept. It's a true point that amortization is a simple mathematical principle and if the borrower wants to make equal payments (as a previous commenter noted), the loan will end up front-loaded.
I don't think it's a financial conspiracy though. It's simply a tool to enable people to more easily afford homes. It wouldn't be financially viable (or mathematically sound) for a bank to take a traditional 360 payment loan, figure out the total interest+principal and then divide it by 360 and have each payment equally go to principal and interest.
If the borrower re-financed after 2 years, the bank would not have actually received its due "interest" for the loan because of the pro-rating. The only way to get around this would be to have a pre-payment penalty equal to the amount of "unpaid" interest. It's easy to forget that banks have to make money in order to have money to lend to people who want mortgages. If banks kept losing money on mortgages, there wouldn't be anymore mortgages.
I started using Amazon for certain grocery items, supplements and some health and beauty items. They happen to have a decent selection of no wheat or gluten free products, they are half the price of any of the grocery stores where I live. I found some other expensive staples we use there, same deal, about half the price of the local store. Everything is taxed where I live so getting the internet tax break is another discount plus the free shipping means I didn't waste 1-5 gallons of gas at over $3 a gallon.
I hope they add more items in the main area that qualifies for the free shipping.
I have been struggling to come up with a plan to shop that doesn't totally kick my butt since we live about 60 miles from the nearest "normal" shopping experience, and about 3-4 hours away from anything exceptionally decent for bulk shopping. Within a half hour we have some basic shopping, but not prices you want to pay on a regular basis or anything. A few convenience items over the hill, but who can afford that as part of their regular budget? I want to stay retired and spend money on things that suit our goals, not go back to work.
Your tow behind cart comment REALLY rings true for this household. I had seen they were starting to do groceries at Amazon, but it looked like they were only test driving it in certain areas . . . sounds like you're getting some grocery items though, Linsey.
Just a quick point in answer to Andrea's comment that she feels she might be getting ripped off with heavy-interest-bearing payments for her starter home:
Even though your first year entailed mostly interest and very little principal reduction, when you eventually get your next home you can port your mortgage to the next property. You can remain on the same amortization schedule (or if you need a bigger mortgage you can look at a blend of rates and amortization, such that you don't have to start from scratch with the lender, and pay all that additional interest.
Thanks for the tax clarification... I am amending the article to include this information. I also see a very well-written article which defines what the law is for my state (Nebraska.) I still think the savings is well-worth it -- even if you are honest about paying your use taxes!
That's just rich, loan officers falling back on that nebulous bogeyman "the law" says. There is no law that requires even amortization over the course of the loan. I myself have drafted all sorts of interesting and variable loans with different and uneven amortization schedules. The "reason" that the loan is "front-loaded" so called, is one of mathematics, not greed. If you insist on equal monthly payments (what is by definition an amortized amount) then you will have the first payments of any loan going only to service the interest on the loan, with very miniscule amounts going to principal. It is this very reason that the payment stays equal as the principal declines. Interest is compounded each period of the loan. Periods are normally 30 days by convention. Financial convention also dictates a 360 day year. Easy right. As the principal declines incrementally so the amount of each payment that goes to paying the interest portion of each payment declines and the amount that goes to principal increases. Not a conspiracy, unless you consider the laws of mathematics to be conspiring against you.
I'm not a lawyer or anything, but I think you are technically supposed to be paying that 7% sales tax.
"If you live in a state that collects sales tax but avoid paying it on an Internet purchase, you are still required to pay the tax to the state. When you pay it directly to the state, it is referred to as "use" tax rather than sales tax.
The only difference between sales and use tax is which person - seller or buyer - pays the state. Theoretically, use taxes are just a backup plan to make sure that the state collects revenue on every taxable item that is purchased within its borders. But because collecting use tax on smaller purchases is so much trouble, states have traditionally attempted to collect a use tax only on big-ticket items requiring a license, such as cars and boats."
I think you are making things a bit confusing here.
The way I think about 30y mortgages is like this:
You have a fixed APR for the loan - let's make it 6%
You take a loan for $200,000.
In the first year, you pay the bank 6% interest on the $200,000 (about $12,000, plus some principal (about $2450)
In the second year, you pay the bank 6% interest on the remaining principal, $197,450, plus some principal (this time, about $2500).
And so on.
The amount of your payments (interest + principal) remains constant, so basically, the amount of principal you pay back is increased in response to the decrease in total interest $ you are paying each year.
So the bank isn't doing anything tricky here. The whole point is that amortization gives you the opportunity to pay the bank back over a 30 year period. You are never pre-paying your interest (or front-loading, as you say.)
If it were possible, I would like to have a fixed interest-only mortgage that I only needed to pay off when I sold the house. It think you would to, if you considered these numbers:
-Interest rate = 6% / yr, but effectively only 2.1% since it is tax deductible
-House appreciates at 4-6% per year
-By paying interest only, your monthly payments are smaller. If you invest the extra money in a broad index fund for the long term, your return is (probably) going to be 6-8%.
Ben Stein says that the main reason why 30-yr mortgages are good for families is because they turn your house into a forced savings-vehicle.
Maybe it helps to look at it from the point of view of the lender. If you've borrowed $100K at 6% (just to make the numbers easy), then they don't have that $100K to invest elsewhere, and they want a certain level of income from it. So the first month, they want 6%/12 (0.5%) or $500 in income. Suppose you never paid any principal. They'd still be getting the 6%/year income and they would presumably be happy. Now, let's suppose you've been paying for a some years and you've reduced the principal to $50K. Now the lender has $50K to invest somewhere else, so they're happy to get less money from you (that is, 6% on $50K, or $250/month).
Without the "front loading" they wouldn't get their full income from the loan until you had finished paying it, and if you managed to pay it off early (say, by selling the house), they would end up receiving a significantly lower effective return on their money.
An easy way to significantly reduce the "front loading" effect is to double the principal payment for the first few years. Because the principal payment is relatively small, it doesn't hurt you much, but you basically pay off two years of your total term for each year you do this. On a $100K loan at 6% for 30 years, you'd start out paying about $100/month extra. After 3 years of doing this, you'll be 6 years into the "front loading" but will have paid a little less than 3 years worth of interest, saving you over $15K.
Of course, if you keep this up, in year 15, you'll be paying $1200/month instead of $600/month, but most of the benefit of this approach comes at the beginning, when you can make the "front loading" work for you instead of against you.
The amortized loan (where you make payments of fixed size, each of which pays down some of the principle) is something of a modern innovation. Until the 1930s, most loans, even home loans, were of the sort that nowadays we call "balloon payment" loans--you'd pay just interest (quarterly or semi-annually) for three or ten years, at which point the loan would come due and you'd be on the hook for the entire amount of the loan.
That old style of loan is still common in the corporate and government bond market--pretty much all corporate and government bonds pay semi-annual interest until maturity, at which point you get your principal back in a lump sum.
While pure alcohol boils at a lower temperature than pure water, a mixture of 95% alcohol and 5% water has a boiling point lower than either. A substance with a lower boiling point than its pure constituents is called an azeotrope.
That law was passed in 1980 so I'm not sure what current lobbyists are doing to change it. But the FDA is pretty much all we have as a benchmark, so one formula is very much like the other. I agree that breastfeeding NEEDS AND DESERVES more publication, and no doubt the FDA feels pressure from the big fomula companies. But all in all, if you can't breastfeed I am simply pointing out that you don't need to spend $26 on a can of formula.
And by the way, thank you Amy and Angie. I hope my articledid the store-brand campaign some justice. Thanks for reading!
Thanks for all the soda info Erin.. I also seem to remember being able to drink one brand of rootbeer while I was pregnant because it was naturally caffeine free. I believe Barq's was one I couldn't drink...but I'm not sure now.
Hi Paul,
Thanks so much for the mention. This is one of THE biggest ways for parents to save money. I hope skeptical parents will give it a try. To make switching easy, they can mix a little store brand in with their premium brand and adjust little by little until they're using all store brand.
I don't drink a lot of soda, but I love caffeine free pepsi! I think it tastes better than regular pepsi, although I never noticed the difference until I started drinking the regular version again. Almost all fruit flavored sodas are caffeine free, but Sunkist is not! It has quite a bit of caffeine as far as sodas go. I did a search for a caffeine chart a while ago and was surprised to see Sunkist on the list.
You are apparently quite the expert on this, guy. I better get off my butt with this ecolodge thing we've been considering so we can have a big old Wise Bread retreat. You can be in charge of the bar!
Because it was traditionally done with hard cider, this seems like a good place to mention "jacking," which is the name for increasing the alcohol concentration by partial freezing.
Basically, you just leave a barrel of cider out overnight after the weather starts to fall below freezing, the pitch out whatever ice forms on the top. Because the freezing point of water is much higher than that of alcohol, the ice will be almost entirely water, so that the remaining beverage will have a higher alcohol content. (This also concentrates pretty much everything else in the beverage, including any remaining sugar and other chemicals that give it its flavor.)
You can repeat the process several times, getting your cider a little harder each time. Just do some "quality control" each time and bring it in once you get it the way you want it.
As far as I know, concentrating the alcohol through jacking is legal. It's also free if you live somewhere where the overnight temperatures fall below freezing, and uses a lot less energy than running a still.
I am from India and every home in India has pressure cookers. They have been popular in India for many many decades... last time when I went home I got one
Everyone loves them because they cook quickly and use less energy.
The problem with American / Chinese made cookers is that they don't whistle at reaching full pressure they only hiss the steam out. I heartily recommend the Hawkins pressure cooker- I guess my family has been using them for over 30 years !
Nora, I hadn't heard of porting a loan, which seems to mean transferring your loan to another property. Is this something done in Canada?
I found this article about portable mortgages offered by Etrade in the Real Estate Journal (2003) and it looks like the company still offers such a loan.
Great post. David Bach is one of my all time favorite motivational speakers and writers. His simple interpretations to investing goes a long away. I also recommend his books.
I was just discussing this topic with a friend of mine and we were trying to figure out a way to get around this "front-loaded" loan concept. It's a true point that amortization is a simple mathematical principle and if the borrower wants to make equal payments (as a previous commenter noted), the loan will end up front-loaded.
I don't think it's a financial conspiracy though. It's simply a tool to enable people to more easily afford homes. It wouldn't be financially viable (or mathematically sound) for a bank to take a traditional 360 payment loan, figure out the total interest+principal and then divide it by 360 and have each payment equally go to principal and interest.
If the borrower re-financed after 2 years, the bank would not have actually received its due "interest" for the loan because of the pro-rating. The only way to get around this would be to have a pre-payment penalty equal to the amount of "unpaid" interest. It's easy to forget that banks have to make money in order to have money to lend to people who want mortgages. If banks kept losing money on mortgages, there wouldn't be anymore mortgages.
I started using Amazon for certain grocery items, supplements and some health and beauty items. They happen to have a decent selection of no wheat or gluten free products, they are half the price of any of the grocery stores where I live. I found some other expensive staples we use there, same deal, about half the price of the local store. Everything is taxed where I live so getting the internet tax break is another discount plus the free shipping means I didn't waste 1-5 gallons of gas at over $3 a gallon.
I hope they add more items in the main area that qualifies for the free shipping.
I have been struggling to come up with a plan to shop that doesn't totally kick my butt since we live about 60 miles from the nearest "normal" shopping experience, and about 3-4 hours away from anything exceptionally decent for bulk shopping. Within a half hour we have some basic shopping, but not prices you want to pay on a regular basis or anything. A few convenience items over the hill, but who can afford that as part of their regular budget? I want to stay retired and spend money on things that suit our goals, not go back to work.
Your tow behind cart comment REALLY rings true for this household. I had seen they were starting to do groceries at Amazon, but it looked like they were only test driving it in certain areas . . . sounds like you're getting some grocery items though, Linsey.
Tell me more . . .
Just a quick point in answer to Andrea's comment that she feels she might be getting ripped off with heavy-interest-bearing payments for her starter home:
Even though your first year entailed mostly interest and very little principal reduction, when you eventually get your next home you can port your mortgage to the next property. You can remain on the same amortization schedule (or if you need a bigger mortgage you can look at a blend of rates and amortization, such that you don't have to start from scratch with the lender, and pay all that additional interest.
Great article Julie!
Thanks for the tax clarification... I am amending the article to include this information. I also see a very well-written article which defines what the law is for my state (Nebraska.) I still think the savings is well-worth it -- even if you are honest about paying your use taxes!
That's just rich, loan officers falling back on that nebulous bogeyman "the law" says. There is no law that requires even amortization over the course of the loan. I myself have drafted all sorts of interesting and variable loans with different and uneven amortization schedules. The "reason" that the loan is "front-loaded" so called, is one of mathematics, not greed. If you insist on equal monthly payments (what is by definition an amortized amount) then you will have the first payments of any loan going only to service the interest on the loan, with very miniscule amounts going to principal. It is this very reason that the payment stays equal as the principal declines. Interest is compounded each period of the loan. Periods are normally 30 days by convention. Financial convention also dictates a 360 day year. Easy right. As the principal declines incrementally so the amount of each payment that goes to paying the interest portion of each payment declines and the amount that goes to principal increases. Not a conspiracy, unless you consider the laws of mathematics to be conspiring against you.
I'm not a lawyer or anything, but I think you are technically supposed to be paying that 7% sales tax.
"If you live in a state that collects sales tax but avoid paying it on an Internet purchase, you are still required to pay the tax to the state. When you pay it directly to the state, it is referred to as "use" tax rather than sales tax.
The only difference between sales and use tax is which person - seller or buyer - pays the state. Theoretically, use taxes are just a backup plan to make sure that the state collects revenue on every taxable item that is purchased within its borders. But because collecting use tax on smaller purchases is so much trouble, states have traditionally attempted to collect a use tax only on big-ticket items requiring a license, such as cars and boats."
http://www.garage.com/resources/reference/internet_taxsales.shtml
I think you are making things a bit confusing here.
The way I think about 30y mortgages is like this:
You have a fixed APR for the loan - let's make it 6%
You take a loan for $200,000.
In the first year, you pay the bank 6% interest on the $200,000 (about $12,000, plus some principal (about $2450)
In the second year, you pay the bank 6% interest on the remaining principal, $197,450, plus some principal (this time, about $2500).
And so on.
The amount of your payments (interest + principal) remains constant, so basically, the amount of principal you pay back is increased in response to the decrease in total interest $ you are paying each year.
So the bank isn't doing anything tricky here. The whole point is that amortization gives you the opportunity to pay the bank back over a 30 year period. You are never pre-paying your interest (or front-loading, as you say.)
If it were possible, I would like to have a fixed interest-only mortgage that I only needed to pay off when I sold the house. It think you would to, if you considered these numbers:
-Interest rate = 6% / yr, but effectively only 2.1% since it is tax deductible
-House appreciates at 4-6% per year
-By paying interest only, your monthly payments are smaller. If you invest the extra money in a broad index fund for the long term, your return is (probably) going to be 6-8%.
Ben Stein says that the main reason why 30-yr mortgages are good for families is because they turn your house into a forced savings-vehicle.
Maybe it helps to look at it from the point of view of the lender. If you've borrowed $100K at 6% (just to make the numbers easy), then they don't have that $100K to invest elsewhere, and they want a certain level of income from it. So the first month, they want 6%/12 (0.5%) or $500 in income. Suppose you never paid any principal. They'd still be getting the 6%/year income and they would presumably be happy. Now, let's suppose you've been paying for a some years and you've reduced the principal to $50K. Now the lender has $50K to invest somewhere else, so they're happy to get less money from you (that is, 6% on $50K, or $250/month).
Without the "front loading" they wouldn't get their full income from the loan until you had finished paying it, and if you managed to pay it off early (say, by selling the house), they would end up receiving a significantly lower effective return on their money.
An easy way to significantly reduce the "front loading" effect is to double the principal payment for the first few years. Because the principal payment is relatively small, it doesn't hurt you much, but you basically pay off two years of your total term for each year you do this. On a $100K loan at 6% for 30 years, you'd start out paying about $100/month extra. After 3 years of doing this, you'll be 6 years into the "front loading" but will have paid a little less than 3 years worth of interest, saving you over $15K.
Of course, if you keep this up, in year 15, you'll be paying $1200/month instead of $600/month, but most of the benefit of this approach comes at the beginning, when you can make the "front loading" work for you instead of against you.
The amortized loan (where you make payments of fixed size, each of which pays down some of the principle) is something of a modern innovation. Until the 1930s, most loans, even home loans, were of the sort that nowadays we call "balloon payment" loans--you'd pay just interest (quarterly or semi-annually) for three or ten years, at which point the loan would come due and you'd be on the hook for the entire amount of the loan.
That old style of loan is still common in the corporate and government bond market--pretty much all corporate and government bonds pay semi-annual interest until maturity, at which point you get your principal back in a lump sum.
are water saving shower heads common???
ive never heard of such a thing!
While pure alcohol boils at a lower temperature than pure water, a mixture of 95% alcohol and 5% water has a boiling point lower than either. A substance with a lower boiling point than its pure constituents is called an azeotrope.
That law was passed in 1980 so I'm not sure what current lobbyists are doing to change it. But the FDA is pretty much all we have as a benchmark, so one formula is very much like the other. I agree that breastfeeding NEEDS AND DESERVES more publication, and no doubt the FDA feels pressure from the big fomula companies. But all in all, if you can't breastfeed I am simply pointing out that you don't need to spend $26 on a can of formula.
And by the way, thank you Amy and Angie. I hope my articledid the store-brand campaign some justice. Thanks for reading!
Thanks for all the soda info Erin.. I also seem to remember being able to drink one brand of rootbeer while I was pregnant because it was naturally caffeine free. I believe Barq's was one I couldn't drink...but I'm not sure now.
Hi Paul,
Thanks so much for the mention. This is one of THE biggest ways for parents to save money. I hope skeptical parents will give it a try. To make switching easy, they can mix a little store brand in with their premium brand and adjust little by little until they're using all store brand.
Angie
I don't drink a lot of soda, but I love caffeine free pepsi! I think it tastes better than regular pepsi, although I never noticed the difference until I started drinking the regular version again. Almost all fruit flavored sodas are caffeine free, but Sunkist is not! It has quite a bit of caffeine as far as sodas go. I did a search for a caffeine chart a while ago and was surprised to see Sunkist on the list.
OK, now that's just laugh out loud, make my coffee (oops, I mean beer) come out through my nose funny! Good one!
With a name like Brewer... what did we expect? :)
Time limits often apply, although I did take something back that was 8 weeks old and they price adjusted. But that's Target for you.
You are apparently quite the expert on this, guy. I better get off my butt with this ecolodge thing we've been considering so we can have a big old Wise Bread retreat. You can be in charge of the bar!
Thanks for the hard cider link--good stuff.
Because it was traditionally done with hard cider, this seems like a good place to mention "jacking," which is the name for increasing the alcohol concentration by partial freezing.
Basically, you just leave a barrel of cider out overnight after the weather starts to fall below freezing, the pitch out whatever ice forms on the top. Because the freezing point of water is much higher than that of alcohol, the ice will be almost entirely water, so that the remaining beverage will have a higher alcohol content. (This also concentrates pretty much everything else in the beverage, including any remaining sugar and other chemicals that give it its flavor.)
You can repeat the process several times, getting your cider a little harder each time. Just do some "quality control" each time and bring it in once you get it the way you want it.
As far as I know, concentrating the alcohol through jacking is legal. It's also free if you live somewhere where the overnight temperatures fall below freezing, and uses a lot less energy than running a still.
I am from India and every home in India has pressure cookers. They have been popular in India for many many decades... last time when I went home I got one
Everyone loves them because they cook quickly and use less energy.
The problem with American / Chinese made cookers is that they don't whistle at reaching full pressure they only hiss the steam out. I heartily recommend the Hawkins pressure cooker- I guess my family has been using them for over 30 years !
The latest Mother Earth News has an article on making Hard Cider, which IS legal to make in the US (the Founding Fathers wouldn't have had it any other way!): http://www.motherearthnews.com/Whole-Foods-and-Cooking/2007-10-01/How-to...