Tuesday, June 24, 2008

Mortgage basics

I just read a two part bit on how mortgages work. This guy often talks about math or programming things that are esoteric and difficult. Worth the time to read, if the time can be had. And, most of my blog reading is about science. These two posts, but especially the first, are really easy to read. There's an error in the formula, but the example is right. It should be

Payment = P*(i/1-((1/1+i)^n))

where P is the Price of the house - or really the money to borrow, i is the interest rate: 0.0575 for 5.75 percent, and n is the number of payments - 360 for a 30 year mortgage. There are rounding issues, so this should be considered approximate. Payment is the payment per period, which is per month for most mortgages.

I learned that i accidentally picked a pretty good mortgage, and then five years later, did a pretty good refinance to lower interest rates. I made some very small mistakes (maybe tens of thousands of dollars), but have recovered from them, mostly in the refinance.

This is Detroit. A friend's folks died last year, and left him and his siblings a house. They all own houses, so they put it on the market. A year later, it's still on the market, but at less than 20% of what they'd started it at. It hasn't sold. Calling it a buyer's market is generous. It's foreclosure city. I assume it's impossible for at least three to five more years to sell my house.

But the banking industry is so greedy that they may have provided me an out after all. It used to be that getting a second mortgage was a last resort sort of thing. But now, banks are trying to sell these loans as "using your equity". And, they're quite aggressive about it. So, perhaps, i could suck all the equity out of the house as cash, and walk away from the house. My equity is probably enough to buy a similar nearby house (perhaps in foreclosure) outright. No loan of any kind.

Mark's articles talk about how there is a conspiracy in the finance industry. Short term profit greed drives it. But there seems to be something similar in the automotive industry. Why sell small affordable, high efficiency, low margin cars, when large high margin vehicles are selling? In fact, offering any small cars at all will just encourage people to buy them. Chrysler sells cars with hemi engines (big powerful engines). GM sells the Hummer. Ford sells the F-150, which was a small pickup when i was a kid. Then, gas went over $4 a gallon and for some reason people don't want to put $100 of gas into their tanks at a time. In the course of a month, gas hogs have gone out of style.

OK, so Ford has the Focus, a 4 door sedan, which if equipped with a 5 speed manual probably can get the kind of gas mileage that my car gets, assuming you drive it the way i drive mine. And sales have skyrocketed. They can't keep up with demand. This is a real problem. It takes awhile to get the pipeline moving. But the demand for the F-150 has dropped to the floor. Even luxury car sales have dropped. What's a Ford to do?

So, the automakers, not just Ford, have claimed that they didn't see this coming. Ford's solutions (available in Europe) won't be available in the states until 2010. That could mean summer of 2009. Chrysler made some investments last year that might pan out around then. GM makes noises, but i'm still waiting for product. This, despite the fact that my car was made in 2000 by GM. As far as i can tell, they don't sell it now.

But from my perspective, the idea that gas will go up isn't news. Maybe i was driving three times as far as anyone else, and so i noticed it sooner. But it was important to me twenty years ago. Well, total cost is also important. In a year, i'm currently spending $3,500 on gas, $800 on insurance, under $1000 on maintenance, and zero on amortization for my fleet. That's $5300 for 35,000 miles, or about 15 cents a mile. That's a quarter of what the government thinks people spend. Actually, it's less than that. My Saturn has increased in value, and maintenance has been much lower. But it freaks me out that i'm paying over a dime a mile. It's 60 cents to go to the grocery store. So i go on my way home from work, saving 60 cents.


DQKennard said...

It's actually occurred to me that now would be the time for me to buy a gas hog, since the dealers are so desperate to unload them. I drive so little that mpg doesn't really make all that much difference. I could drive a huge pickup and the daily cost wouldn't be all that much worse, plus I'd have the cargo capacity if I needed it.

Maybe I could get a Hummer (H2, not that wimpy little H3), or an F350 (I *laugh* at puny F150!). Maybe it should have the license place "COMPNS8".

OK, I wouldn't get a Hummer. My objection to the Hummer isn't that it's big; if you need big, you need big. The problem with the Hummer is that it's badly designed, in the sense that it makes inefficient use of its bigness.

DQKennard said...

On mortgages: I've got a good one. I originally bought the house under one of those "first time buyer" programs, so got a rate that was below market for the time, plus got some other goodies. An important part of that was that there was a second mortgage that paid down monthly payments for the first few years. I'm just about done paying off that -- not that I'm in a rush, since that's at zero percent. I refinanced the primary mortgage in 2002 or 03, at a really nice rate (lower than current market level).

I had 18 years left on a 30 year fixed when I refinanced to a 15 year fixed, so that cut 3 years off the payoff right there. Plus, the rate was good enough that the monthly payment went down. I kept the payment about the same as I had before, with the difference going straight to principal, so I'll be finished even quicker.

I'll be finished with mortgage payments just about the time I'll be starting my daughter's college payments. sigh.

Stephen said...

Yes, do the math. Get the gas hog if it makes sense. This is good for the environment. Save even more by renting it out to your neighbors from time to time. Talk to your insurance company. It can work.

If you do alot of miles, two things make sense to me. Get a pickup truck as an extra car. Use it when you must. Or. Put a trailer hitch on the car, and pull a cheap trailer when you must.