Oakland CPM Archive/oakcpm.iso/cpm/basic/mocst3.lbr/MORTCOST.DZC/MORTCOST.DOC

Text File | 1988-01-20 | 17KB | 397 lines

MORTCOST . . . A MORTGAGE & LOAN COST ANALYSIS TOOL   (V3.0)

MORTCOST . . .

--Compares the total costs of different mortgages, including so called
  flexible mortgages.

--Provides the cost of the loan for each year of the loan.

--Estimates what tax benefits you will get from the loan.

--Helps you to decide how many years long to make the loan.

--Shows you the effect of inflation when financing a home.

--Helps you to decide if a mortgage should be refinanced at a lower
  interest rate.


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DISTRIBUTION RESTRICTIONS

The following two restrictions apply to the use and copying of this program
package.  (1) This documentation file must accompany any copy of the
program code, and (2) any distribution and use must be non-commercial in
nature.   Business use of the program or resale for profit may only be done
with the expressed written permission of the authors listed below.  We
retain all rights of Copyright protection.

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USER SUPPORT, AND WHAT IS IN IT FOR YOU.

This program will help you to make sound loan decisions and can save you a
lot of money.  We have found that apparently similar loan plans can differ
in cost by thousands of dollars.

Many users have downloaded the program from Compuserve and other BBSs.  Yet
despite previous requests for user support, our costs still exceed revenue.
Ours is a business venture, so obviously that loss cannot continue forever.

By paying for MORTCOST, you are supporting low cost software development.
You also gain in at least two other ways:

1.  We will be able to keep the program current.  If you need to use the
program at some future date for another loan or refinancing, then an
up-to-date version will be available.  If enough people don't support
MORTCOST, we will have to end the project and the program will die of
obsolescence as tax laws or loan plans change.

2.  If you contribute $10 or more, we will enter you onto a user
registration list.  If changes become necessary, we would likely revise
MORTCOST again.  As a registered user, we will notify you by mail that the
next revision has occurred, along with a detailed description of the
changes.  With this information, you can either . . .

  a) order it from us on diskette for a charge of $6.00.
  b) download it from a BBS when it becomes available, or
  c) ignore the notice and not do anything.

With this information you know right away what the revision is all about.
And if you do need the new version, and we can write to your disk format,
you can choose to receive the program directly from us in the mail (U.S.
only).  This saves you time (no downloading, no libraries to unpack), and
phone service charges.  We support PC-DOS & MS-DOS and many CP/M 5-1/4 inch
disk formats, including some versions of Radio Shack.

Please send payments to:

          Terry and Joann Quinn
          700 Fairoaks Road, RR # 4
          Metamora, IL  61548

Thank you for your help.
If you have any ideas on how to improve the program, please let us know.

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INTRODUCTION TO MORTCOST

When comparing mortgage plans between different financial institutions, one
often encounters lower rates with higher points at one bank compared to
another.  How do you compare these two loans to see which is cheapest?  And
will the income tax break that you receive on mortgage interest be affected
by the plan?

To make matters worse, in recent years banks and savings and loans
developed new loan plans with lower initial interest rates that could go up
or down market conditions changed.  Because of this, it can be misleading
to compare the loans between two banks by looking only at the initial
interest rate.

Also, in periods of declining interest rates, it would be valuable to know
if refinancing your mortgage to a lower rate would pay for itself after you
have paid the costs of refinancing.

For most people, the home purchase is the biggest expense of their
lifetimes.  MORTCOST provides a way to minimize that expense by studying
these and other problems in detail.

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HOW MORTCOST WORKS

MORTCOST computes the monthly loan payment, the principal and interest
paid, and principal remaining.

A key feature of the program is the ability to specify different interest
rates and other inputs for any year of the loan.  This permits analysis of
variable interest rate or "flexible" mortgages and baloon mortgages,
something that other mortgage analysis programs can't do.

Additional costs can be entered for any year in the loan, such as the
direct costs that the loan company charges (usually non-deductible for tax
purposes, i.e. title searches and attorney fees), and up front interest
charges payable at loan closing (often referred to as "points" or "closing
costs").

MORTCOST displays the above values for each of the loan years.  It then
estimates the tax deduction that you should expect to receive.

Next, the program computes and summarizes the year-by-year total cost of
the loan, which is the sum of the principal and interest payments, points
and closing costs, and direct costs, MINUS the tax deduction.  It then
accumulates these costs from the start to any year of the loan.

Finally, the accumulated sum is displayed MINUS the principal that you have
paid on the loan.  This is useful for some comparisons, because if you sell
the house before you reach the end of the loan, you get the principal back.

If you choose to estimate what you think inflation will do in future years,
the program will show the results from above as "Adjusted for Inflation."
See section on "HOW TO INTERPRET THE RESULTS" for an explaination of the
benefits of this feature.

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USER INSTRUCTIONS

MORTCOST will prompt you for the inputs to the program.  A few conventions
are helpful, however.

When the program refers to the "year" of the loan, it assumes that the loan
is written at the start of year 1.  A 30 year loan then runs to year 30.
Calendar years like 1986 are not used.

Percentages are enterred as numbers greater than 1.  For example an 11.5%
loan is entered as 11.5.  Monthly loan payments are assumed in the
calculations.

If you want an entry to change during the loan period, enter only the year
when the change starts.  MORTCOST will fill in the numbers for the years
in-between.  For example, if the loan had an 12% interest rate to start,
but changes to 14% after the completion of 3 years, you would enter those
inputs as shown in the following example:


ENTER LOAN INTEREST RATE FOR FIRST YEAR
(For example, 11.5% would be entered as 11.5)  Enter here--> 12

IF INTEREST RATE CHANGES DURING LOAN PERIOD, ENTER THE YEAR THAT THE NEW RATE
STARTS AT AND THE NEW RATE.  NOTE:  FIRST YEAR OF LOAN IS YEAR 1.
To skip to next input, type S for YEAR

YEAR--> 4
INTEREST RATE--> 14
YEAR--> S


Once you have completed inputs, you can then compute the loan, display the
results to the screen, and/or send them to a printer.  All of the input
values are held in memory, and by typing numbers from the menu, you can
review the inputs to see if they were enterred correctly.  If you wish to
make a change, just type "C" and the number of the input.

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REGARDING TAX CALCULATIONS

Current U.S. tax laws permit a deduction for loan interest charges.  If you
itemize deductions on your income tax, this deduction reduces your total
loan cost.  The amount of deduction will vary, depending on your tax
bracket, length of loan, interest rates, and points.

To compute the tax savings, the program asks you to input your tax bracket.
If you are unfamiliar with what your income tax bracket is, keep in mind
that it is the percentage that you would be taxed on any new money that you
would make over your current income.  If you use tax rate schedules when
you do your income tax, it is the percentage figure shown on the tax rate
schedule for your taxable income bracket.

If you use tax tables, find your taxable income in the tables, and see how
much more tax you would pay if your income was $1000 more than now.  Divide
the amount of additional tax you would have to pay (not the total tax) by
10, and that is your bracket, expressed as a percentage.

If you have had your tax prepared, the preparer can easily tell you what
your bracket is.

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HOW TO INTERPRET THE RESULTS

A. COMPARING LOANS

By looking at the TOTAL LOAN COST figures at the bottom of the program
output, you can compare two or more loans to find the least expensive.
This would be the correct way to analyze a loan if you expected to live in
the house until the loan was paid off.  The TOTAL LOAN COST includes the
repayment of principal.

Sometimes, you may not be planning to use the entire length of the
mortgage.  For example, you might expect to be transfered by your company
in 5 years, and sell the house then.  In this case, you should look at the
costs of the loan at 5 years, not the total cost.

In this latter case, the portion of your monthly payments that have gone to
reduce the loan principal will be returned when you sell the house.
Therefore, you may want to look at the CUM. COST MINUS PRINCIPAL PAYMENTS
columns when comparing the loans.

B.  HOW LONG SHOULD A LOAN BE WRITTEN FOR

Generally, the length of loan will be based on a number of factors, such as
how much you can afford on monthly payments, how long you expect to live in
the house, whether you will be retired when the loan expires, etc.  But the
cost of the loan is also a factor.  Some loans have higher initial closing
costs or "points", but with lower nominal interest rates.  MORTCOST helps
you compare those differences, by simply running the analysis on each loan
and comparing the loan costs.  See the next section on inflation for more
information on this.

C.  HOW DOES INFLATION AFFECT A MORTGAGE

To explain how inflation enters the picture, think of the older folks who
are paying less than $100 on their home mortgage payments.  We envy them
now, but when they purchased their homes, those payments were just as tough
as today's higher monthly payments.  In the ensuing years, however,
inflation has decreased the value of the money, taking the "pain" out of
the house payment.

With inflation, as the loan gets older, it takes less "real money" to make
the house payment.  By showing the total cost of the loan and other
summaries in dollars "Adjusted for Inflation", you can see what the costs
are expressed in "today's dollars."

Using this feature, MORTCOST can help you decide between a short vs a long
mortgage or loan.  Occasionally, but certainly not always, depending on
inflation and the loan interest rate schedule, a long loan may be better
for your circumstances.  Even though you may pay more total dollars on the
long loan, the real value of the money that you pay may be less than with a
shorter loan.  The real value of the money is shown in the colums "ADJUSTED
FOR INFLATION."

D. SHOULD YOU REFINANCE IF INTEREST RATES DROP?

Usually, if you refinance a loan, there are a number of loan origination
costs associated with the refinancing.  MORTCOST helps you decide if it is
a good investment to pay these costs to get the lower rate.

First, use MORTCOST to run your current loan from its beginning.   Next,
determine what year you are in of that loan.  (Example:  If you took out
the loan about 5 years ago, you are near the end of YEAR 5).  Check the
PRINCIPAL LEFT column for that year to see how much owe on your current
loan.

Now rerun your current loan, but when MORTCOST asks for the principal
amount, use the amount you still owe.  For the number of years of the loan,
use the number of years you have left to pay.  If you do this correctly,
MORTCOST will compute the same monthly payment that you are currently
paying.

When making the run for the remainder of your current loan, do not include
up front points and direct loan costs unless you still will be paying them
in this or a future year (that can happen with some types of variable and
balloon mortgages).  This run now represents the costs that remain on your
current loan.

Now run the loans that you are considering refinancing to with all of the
closing costs and points included.  These represent the costs of your new
loan if you refinance.

At this point, you can directly compare, year by year, the cost of what
remains on your current loan to any that you might refinance with.  The new
loans will probably be more expensive at first, because the new points and
closing costs.  But if the interest rate of the new loan lower, at some
point the new loan total cost may drop below your old loan.  That tells you
the number of years that it will take before it will pay off to refinance.
With that information you can decide if it is worth doing, as well as which
refinance plan is best.

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HOW TO ESTIMATE INFLATION, TAX BRACKETS, ETC?

With an analysis tool such as this, your results depend in part on the
assumptions that you make.  For example, it is obviously guesswork as to
what inflation will be like in the future.

Since it is so easy to change these assumptions and rerun the program,
don't be afraid to experiment.  Run your loan candidates at a conservative
estimate and a liberal estimate.  You may find that some plans will look
good or bad no matter what assumptions you make.

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LIMITATIONS

So that it doesn't write a book, MORTCOST only calculates answers on an
annual basis.  It does not give a month by month computation, but it does
show the monthly payment in any given year.  You will find that this is
sufficient to tell the difference between various loan plans.

Most flexible mortgages are set up so that if an adjustment in interest
rates occurs, the loan payment will be recomputed based on the principal
remaining at the time of the adjustment.  MORTCOST can calculate this type
of loan.

A few flexible mortgages are written so that the payment remains constant
no matter what.  MORTCOST does NOT analyze this type of flexible mortgage.

The only limits on the dollar size of the loan are primarily related to
output display.  Loan principals up to $10 million dollars should be no
problem, and higher amounts will run depending on the length of the loan
and interest rates.  Watch for funny characters on the output (like %
signs) if you are running these very large loans.

During initialization, the program sizes itself to be able to handle loans
with periods of up to 60 years in length.

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DISCLAIMER

We have obviously tried to insure that the formulas used throughout the
program are correct.  Since, however, we do not have direct control over
the use and distribution of the program, or the interpretation of the
results, we provide no guarantee as to the accuracy or correctness of the
program or its output and we assume no liability for its use or misuse.

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REQUIREMENTS TO RUN MORTCOST

Software:  MORTCOST was written in BASIC using a minimum of "bells and
whistles" so that it would be compatible with the greatest number of
computers brands possible.  Your BASIC interpreter must be capable of
handling "PRINT USING" statements.  The program was written on Microsoft
BASIC, and tested successfully on IBM BASIC and GW-BASIC.

Hardware:  CRT should have 80 column by 24 line display.  If number of
lines are less than 24, the program will run, but some screen displays may
scroll off.  An 80 column printer is optional.

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CLEAR SCREEN COMMAND

The generic form of MORTCOST uses a screen clearing command at line 100 that
should work with any computer.

100 FOR IS=1 TO 24:PRINT:NEXT IS:RETURN

To speed the program a little, that line can be editted or replaced with a
screen clear command specific to your computer.  Some distributed copies of
MORTCOST may have that change already made.  If your copy of the program
bombs out at line 100, either replace the line with the one above, or make
up your own screen clear command in the form:

100 XXXXXXX : RETURN

   where XXXXXXX is the command to clear the screen for your computer.

Examples are given below:

For IBM and clones, and Radio Shack:
100 CLS:RETURN

For Kaypro, Osborne, or others responding to ADM-3A commands:
100 PRINT CHR$(26):RETURN

For Apple:
100 HOME:RETURN

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ACCURACY:

Single precision calculations are sufficient for cost estimating using
MORTCOST.  If you wish to run the program with double precision however,
insert the following line:

50 DEFDBL C,D,G,H,L,P,T,X,Z

(Caution:  This little change slows the program down a lot).

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COLOR

If you want to customize your version of MORTCOST to give color output, you
can add program lines at the start to do that.

40 COLOR 7,1

will cause IBM compatible computers with color terminals to display in
white on blue.
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that change already made.  If your copy of the program
bombs out at line 100, either replace the line with th