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(For purchase, go to the iTunes App Store)
Mortgage Calculator
Buying a house takes savings, or capital, for the down payment and cash flow over time to cover the mortgage and other payments. This application allows you to analyze your ability to purchase a house, with the impact of the income tax savings generated by deducting your mortgage interest (and property taxes, in the advanced app). This tax savings lowers your effective payment. This is important in deciding if your cash flow will really allow you to afford to purchase a house.
Buy vs. Rent
Sometimes it is better to rent than to buy, as it was in 2007 and 2008. Other times, buying is better over time, as in any time before 2002 through now. This application allows you to analyze your decision to buy or keep renting. Changing the rate of return on savings, or the rate at which rent or house prices increase, will each have a large impact on your conclusions. You may want to do some homework on these variables to see what current analysts are forecasting (but be careful, some thought housing prices could only go up, which we all know can attest was a major flaw in their analysis).
Pay off your Mortgage Early – or not
Should you pay down your mortgage sooner than the lender requires? This depends on what you do with the money that could go to the mortgage. If you are investing those funds, then this application allows you to analyze how best to increase your total net worth, with investments or increased payments to principal.
More Information
If you have more questions, please check out our web site, where we have posted a more detailed analysis — http://www.sab-esq.com/
INPUT AND UNDERSTANDING THE ANALYSIS
Mortgage Calculator
The app allows you to input the financial information from a contemplated purchase. For this, you need to know the house cost, the amount and interest rate on the contemplated mortgage, your marginal tax rate, etc.
Here are the inputs line by line:
Price of home: purchase price as anticipated or per agreement
Down payment: amount of capital you are required to invest
Mortgage term: the number of years for the mortgage, usually 15 or 30
Mortgage interest rate: the interest charged on the mortgage
Marginal Tax Rate: the IRS (or combined federal and state rate, if you can deduct mortgage interest on the state income tax returns) marginal tax bracket (look at your last year’s tax return)
Buy vs. Rent
The app allows you to compare a contemplated purchase to continuing to rent. In 2006, renting would have served you much better than buying!
For this comparison, you have the same inputs as for the Mortgage Calculator, plus the following:
Savings: the amount set aside for the house or other uses
Rental costs: your annual rent payments, including any utilities, etc.
Annual rent increase: an estimate of the rate the rent will increase each year
Closing costs: these come from savings, on top of the down payment
Property taxes: these are part of your annual cost, but get deducted
Annual maintenance: there are always costs to owning a home, from fixing a door to replacing a roof – try to estimate and annualized amount
Return on savings: this is the investment return you anticipate
Appreciation on home: this is the rate at which you expect the house to appreciate
As noted above, this calculation is very sensitive to the investment, rent increase and home appreciation assumptions. If you had used negative appreciation for your house in 2006, you would have known to rent and not buy.
Pay off your Mortgage Early – or not
This calculation looks at the savings of interest as the payment of mortgage principal is accelerated vs. the alternate use of those same funds in buying additional investments.
For this comparison, you have the same inputs as for the Mortgage Calculator and Rent vs. Buy, with these changes:
Property taxes: this input was left out
Annual maintenance: this input was left out
Extra principal: this is the amount you anticipate adding to your monthly payment
Extra principal after 10 years: this is the amount by which the extra payments have reduced the total principal, which also shortens the life of the loan
Investment after 10 years: this is the amount by which your net worth increased if you invested the amount you would have used to pay down the principal
Again, this calculation is very sensitive to the return on savings or total investment return.
Use Mortgage Financing or not – all cash purchase
This calculation looks at the cost of the mortgage compared with tying capital up in your home when that money could be invested. Depending on the rate of return on investments and the appreciation of your home, this analysis shows whether you should use a mortgage or pay all cash.
Marginal Tax Rate: the IRS (or combined federal and state rate, if you can deduct mortgage interest on the state income tax returns) marginal tax bracket (look at your last year’s tax return)
Investment Rate: this is the investment return you anticipate
Total investments: this is the total of investments before the purchase, where part of it goes to the home purchase as a down payment or as the total payment
Mortgage amount: this is the amount that you would finance
Investment rate: this second rate is for the appreciation expected from the home
Property: this is the total cost of the home
Mortgage rate: this is the pre-tax mortgage interest rate
Note: having a mortgage also diversifies your investments, as less of your net worth is in a single asset, your home. And, as above, this calculation is very sensitive to the investment, and home appreciation assumptions.