Free Advice

Caveat Emptor (Latin for “buyer beware”) is very appropriate in these volatile financial times. First my personal Caveat! I am in business to make a profit and therefore a living by selling my amortization software which I initially developed in 1980. As a byproduct of my marketing efforts, I like to think I have helped some people along the way understand how mortgages and loans are calculated and eliminated some of the mystery.

In the USA mortgages and personal loans are calculated the same way using monthly compounding. In Canada mortgages use semi-annual compounding and personal loans use monthly compounding. The mathematics, logic and rules are the same. The only difference is the “compounding” influences the numerical value of the monthly interest calculation. An 11.7106% American monthly compounding loan is EXACTLY the same (or equivalent) to a 12% Canadian semi-annually compounded loan. The amortization schedules are identical as verified by the fact that the effective interest rates are the same.

My late Father, Alex Cirotto gave me very wise advice early on in life. He said, “don’t buy into anything you don’t understand”. I only wish I had listened to him earlier. An old proverb, “Fool me once shame on you, fool me twice shame on me” is well worth repeating. A well worn marketing slogan, by Karl Malden used to say, “don’t leave home without them”, referring to American Express Travelers cheques. Here is my new slogan;.

“ an amortization schedule, don’t get a loan without one”.

If you want to play hockey you must learn how to skate and learn the rules. If you want to play the mortgage game, you must learn the rules. At some point in high school a student should be given a much needed and better grounding in practical interest calculations concerning mortgage loans before graduation. An unsound mathematical background leaves future citizens at the mercy of slick marketing campaigns and government bureaucrats (see Fraser Institute report).

The MacDonald’s restaurant chain has firmly imbedded the mantra, “you deserve a break today” into the North American mindset and a lot of people have been fooled into thinking they could afford a mortgage. Don’t get fooled again. When getting a loan, ask for an amortization schedule immediately up front. This is the first rule of the mortgage game. If the lender won’t provide one then change lenders. There is no excuse for not having an amortization schedule. As of this date there are 377,000 web sites on the Internet that provide free amortization schedules. Get one and learn how to read it!

Prepaying Principal Tip

Prepaying Principal Tip
You can save tons of money on interest if you prepay your mortgage principal payments! Here is a quick tip, at the risk of putting myself out of business. You only need one amortization schedule for the life of your mortgage in order to prepay principal PROVIDING, your prepayments coincide exactly as per your amortization schedule.

For example, if the principal portion of payment #2 ($252.26) is paid along with payment #1 then the interest savings of $1,148.57 is saved and the regular payment #2 disappears and the amortization period is reduced by one payment. In fact if you cut out payment #2 from the schedule after the prepayment and tape it back together the schedule is mathematically correct except for the payment dates and the payment numbers. In this example, a prepayment of $252.26 saves you $1,148.57 of interest (subtract the two SPREADSHEET Totals to verify) . Think of it this way, you must pay back all the principal however by choosing to prepay principal before it is due you save on the interest. So do it in accordance with your amortization schedule and know your savings without the need of a computer or software. How refreshing is that for free advice?

This technique can be applied at any time in the schedule and for any number of payments as long as the prepayment amount coincides with the schedule. So if all the principal payments from 13 to 24 were added up and prepaid along with payment 12 the savings in interest would be the sum of the interest portions of payments 13 to 24.