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1995-01-30
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M O R T C O S T (V 5.0)
. . . AUTOMATED MORTGAGE & LOAN COST ANALYSIS TOOL
by Quinn Software
If you think that MORTCOST is just another program that calculates
loan payment tables, then keep reading.
Banks and loan companies now offer a variety of loan plans. Some
offer lower interest rates but they are accompanied by higher up-
front interest points. Sometimes the interest rate is adjustable
and can change during the life of the loan. In any event, the
simple amortization tables that other mortgage programs use are
just not sophisticated enough to make accurate comparisons.
Other programs neglect the effects of inflation and interest
deductibility on your income tax return. MORTCOST includes all of
these factors in the loan cost calculation, and permits you to
make accurate comparisons of complex loan plans, customized for
your particular financial situation.
Simply put, the banks want you to be confused. It is their best
chance to get you to pay more for your house than you have to.
MORTCOST gives you a chance to cut through the trickery by showing
you the bottom line. If you don't take the time to look at all
the factors that affect your loan cost, you could end up paying
thousands of dollars more than necessary.
MORTCOST is still the only program that . . .
Compares the TOTAL costs of different mortgages.
Calculates loan costs for "flexible" mortgages.
Estimates how much tax benefit is provided by a mortgage.
Helps you to decide how many years you should finance.
Shows you the effect of inflation when financing a home.
Helps you decide if you should refinance if interest rates drop.
Has flexible, automated input to simplify "what-if" calculations.
Does automatic, year-by-year comparisons of any two loan plans.
- i -
T A B L E O F C O N T E N T S
Topic Page
IF NOTHING ELSE, PLEASE READ THIS ONE PAGE....................iv
DISTRIBUTION AND COMMERCIAL USE LIMITATIONS................... 1
PRINTING THIS DOCUMENTATION FILE.............................. 2
STARTING THE PROGRAM -- MONITOR COLOR OR B/W.................. 2
OVERVIEW OF MORTCOST ......................................... 3
HOW MORTCOST WORKS ........................................... 3
EASY MORTCOST FEATURES AND MENUS ............................. 4
A. MENU TREE ................................................ 5
B. HELP OPTIONS (H COMMANDS) ................................ 6
C. OPENING SCREENS .......................................... 6
D. RULES USED FOR DATA ENTRY ................................ 6
E. MAIN MENU ................................................ 7
1. DIRECTORY AND FILE PATHS (D COMMMAND) ............... 7
2. FILE COMMANDS (F, S, & L) ........................... 8
3. COLOR OPTIONS SELECTION (O COMMAND) .................. 8
4. DOS SHELL (E COMMAND) ................................ 9
5. RE-ENTER ALL INPUTS (R COMMAND) ...................... 9
6. AUTOMATIC LOAN COMPARISON ANALYSIS (A COMMAND) ...... 10
F. AUTOMATIC LOAN COMPARISON PROGRAM ....................... 10
1. INITIAL MENU ........................................ 10
2. STARTING THE ANALYSIS ............................... 11
3. OUTPUT MENU ......................................... 11
- ii -
T A B L E O F C O N T E N T S
Topic Page
USING EASY MORTCOST ......................................... 13
A. COMPARING THE COST OF TWO OR MORE LOANS ................. 13
B. AUTOMATIC COMPARISON OUTPUT DESCRIBED ................... 14
C. INTERPRETING AUTOMATIC COMPARISON OUTPUT ................ 14
D. FOR HOW LONG SHOULD A LOAN BE WRITTEN? .................. 15
E. HOW DOES INFLATION AFFECT A MORTGAGE? ................... 15
F. SHOULD YOU REFINANCE IF INTEREST RATES DROP? ............ 16
G. INFORMATION ON INCOME TAX DEDUCTION CALCULATIONS ........ 18
H. HOW DO I ESTIMATE INFLATION, TAX BRACKETS, ETC? ......... 19
I. DETAILED DESCRIPTION OF THE OUTPUT ...................... 20
J. PROGRAM LIMITATIONS ..................................... 22
Adjustable Rate Mortgages (AMRs)
Maximum Loan Size
TECHNICAL TOPICS ............................................ 23
A. CONFIGURATION FILE (MORTCOST.CFG) ....................... 23
B. TEMPORARY FILES ......................................... 23
D. MEMORY REQUIREMENTS ..................................... 24
E. DISCLAIMER .............................................. 24
F. ACKNOWLEDGEMENTS ........................................ 24
G. ABOUT QUINN SOFTWARE .................................... 24
- iii -
IF NOTHING ELSE, PLEASE READ THIS ONE PAGE
Prior to 1995, MORTCOST was distributed as a BASIC language
shareware program. Customers who paid a registration fee received
an advanced version of the program called EASY MORTCOST.
With this release of Version 5.0 of MORTCOST, we've incorporated
ALL of the capabilities of EASY MORTCOST into the shareware
distributed version of the program that you now have in hand.
Why did we make this change? Two reasons, really. First, we've
worked very hard to make this program useful to our customers, and
we had hoped that, in return, we could make a profit. Yet while
we remain thankful to those customers who did make registration
payments for EASY MORTCOST, we've never made enough to even
recover our expenses.
Secondly, because there were relatively few EASY MORTCOST
registrations, not very many people were benefiting from it. For
the amount of work that went into the program, we'd like more
people to be able to use it.
So we've now released the "professional version" of MORTCOST as
shareware. More people will now be able to use EASY MORTCOST to
save money when making home purchases or refinancing loans.
Do we still hope to earn money from MORTCOST? Of course we do!
MORTCOST is still shareware. So if you find that using this
software provides some value to you, please consider sharing a
little of that value with us for writing the program.
How much should you pay? Well, don't send us anything if you
honestly don't think the program helped you. And don't send us
more than $35, because we've never asked for more than that. What
you send is up to you; we'll appreciate any contribution. (We are
hoping that enough people will send us money that someday we will
make a profit from this business).
Please send your support payment to:
Quinn Software
Terry and Joann Quinn
700 Fairoaks Road RR#4
Metamora, IL 61548
p.s. Mortcost can help you to save money on your loan. But it
obviously isn't something that you will use every day. So if it
has helped you, and you want to make a shareware payment, please
do so before you forget. And even if you decide you don't want to
contribute, but still liked the program, let us know what you
liked about it by writing to us. Our Internet address is . . .
tquinn@heartland.bradley.edu
- iv -
DISTRIBUTION AND COMMERCIAL USE RESTRICTIONS
1. It is okay to give a copy of MORTCOST Version 5.0 to your
friends, or upload it to electronic bulletin boards, but please be
sure that this documentation file MORTCOST.DOC is included with
the program.
2. The program may NOT be distributed from any software library,
distribution service, or similar operation that charges
a fee for
the distribution of software, unless the software is distributed
on CD-ROM. We've learned the hard way over the years that these
"services" often represent the shareware as fully paid, even though
the authors are not getting any of the money.
3. MORTCOST may NOT be used commercially without special
licensing from the authors. Use by realtors, even if self-
employed, falls under this commercial restriction. If you are
planning on using MORTCOST commercially, then it is a tool of your
business, one that you should be willing to pay for. Contact us,
we'll work out license for you that is fair.
PRIOR VERSIONS, PREVIOUSLY REGISTERED USERS
We will continue to honor and process requests for distribution of
EASY MORTCOST that originate from the documentation of prior
versions of shareware MORTCOST.
- 1 -
PRINTING THIS DOCUMENTATION FILE
You can print this manual out by using the DOS command . . .
COPY MORTCOST.DOC PRN<cr>
where <cr> represents hitting the ENTER key. If your printer
supports the form feed character (ASCII 12), the documentation
will have correct page breaks. A wide left margin is used so that
you can punch binder holes.
STARTING THE PROGRAM -- MONITOR COLOR OR B/W
EASY MORTCOST runs in the "DOS" operating system. The program is
distributed as the file MORTCOS5.EXE, so that you will not mix it up
with any prior versions of MORTCOST. You may safely rename the
file to MORTCOST.EXE if you wish, with the DOS rename command or
any file utility.
To start the program, just enter the filename from the DOS prompt.
For example . . .
MORTCOS5 <cr>
The program is distributed assuming that you have a color monitor.
If you only have monochrome, and you have difficulty starting the
program, erase the file called MORTCOST.CFG. Color can be
adjusted from the main menu, by hitting command O to select COLOR
OPTIONS, and choose an appropriate color or monochrome option.
More information is provided later in this documentation on custom
color options and how EASY MORTCOST stores its configuration.
- 2 -
O V E R V I E W O F M O R T C O S T
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 really cheapest? How do income taxes affect
your decision? And is inflation important also?
To make matters worse, in recent years banks and savings & loans
developed new loan plans with lower initial interest rates that
could go up or down as 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.
Finally, in periods of declining interest rates, it would
certainly be useful to know if refinancing your mortgage to a
lower rate would pay for itself after you have paid the high up-
front 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.
HOW MORTCOST WORKS
MORTCOST computes the monthly loan payment, the principal and
interest paid, and principal remaining. Of course, lots of
mortgage programs do that. But MORTCOST goes much farther.
A key feature of this program, however, is the ability to specify
different interest rates, tax and inflation factors, and other
costs for any year of the loan. This permits analysis of variable
interest rate or "flexible" mortgages and balloon mortgages,
something that other mortgage analysis programs can't do. It also
gives you maximum flexibility to model the analysis to your
particular circumstances.
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", and sometimes
deductible from income tax).
MORTCOST displays the above values for each of the loan years. It
then estimates your income tax deduction for the loan.
- 3 -
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, closing costs, and direct costs, MINUS the tax
deduction. It then accumulates these costs from the start of the
loan 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 will get the principal back.
If you choose to estimate what you think inflation will do in
future years, the program also shows the results from above as
"Adjusted for Inflation." See section on "HOW TO INTERPRET THE
RESULTS" for an explanation of the benefits of this feature.
E A S Y M O R T C O S T F E A T U R E S A N D M E N U S
EASY MORTCOST has a number of features to simplify your loan
analysis. This first section describes the "technical" use of
these features, and how the various menus are organized. In the
section following that, called USING EASY MORTCOST, we will
describe how to actually run loan analyses taking advantage of the
features.
- 4 -
A. MENU TREE
The following illustration shows how the screens and menus of EASY
MORTCOST are organized.
OPENING SCREEN
|
/ \
/ \
/ \
INPUT BYPASS
ALL |
VARIABLES |
\ /
\ /
\ /
|
MAIN MENU
view inputs
change inputs
calculate single loan
save inputs to file (NOTE: Inputs must be
send output to printer Saved before using
monitor or file Automatic analysis).
Automatic loan analysis <-------->-----------
set default drive and path |
display file directory AUTOMATIC LOAN ANALYSIS
set colors select 2 input files
DOS shell to compare
exit program select OFFSET year
|
/ \
/ \
/ \
REGULAR REFINANCE
choose plan set principal
which sets option
factors
\ /
\ /
\ /
\ /
|
START ANALYSIS
SUMMARY REPORT
output size option
send to printer
monitor or file
- 5 -
B. HELP OPTIONS (H COMMANDS)
Throughout the program, EASY MORTCOST provides online context
sensitive help. Whenever the program tells you that you can type
H for Help, doing so will provide you with additional details on
how to run the program at that point. In some places in the
program, when you type H, the help screen will pop up immediately.
At other times, enter the H as if it were the requested input, and
when you hit the ENTER key, the help screen will be displayed.
C. OPENING SCREENS
After you have passed the title screen, EASY MORTCOST gives you
two choices. If you type G, the program will walk you through all
the individual data input menus, prompting you for the input
values that MORTCOST uses to determine a single loan's cost. If
you type ENTER instead, the program will go to the MAIN MENU where
you can load the inputs from a file, if you have saved one
previously.
D. RULES USED FOR DATA ENTRY
MORTCOST will prompt you for the inputs to the program. Many
context sensitive help screens are also provided. Knowledge of a
few conventions may be 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 1989 are not used.
Percentages are entered 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 to evaluate a loan where one of the inputs will change
during the course of the loan, such as adjustable interest, enter
the year when the change starts. MORTCOST will fill in the
numbers for the years before and after the change.
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
entered correctly. If you wish to make a change, just type "C"
and the number of the input.
- 6 -
E. MAIN MENU
The MAIN MENU, as shown on the previous tree structure, is used to
enter, review, modify, and compute the cost of one single loan
plan. You should use this area of the program to individually
enter the loans that you comparing . Next, insure that the inputs
associated with each particular loan are correct, by running a
cost computation (with the M,P, or F functions), and reviewing the
results. Once you are satisfied that the inputs are correct, use
the S command to Save the input file for future runs, or for use
in the Automatic Comparison Analysis option.
The H command on the MAIN MENU screen provides online description
of all the menu functions. A few of them, however, deserve some
extra discussion to help you understand the flow of the program.
1. MAIN MENU -- DIRECTORY AND FILE PATHS (D COMMMAND)
This option on the MAIN MENU permits you to assign defaults that
will help you work with disk files.
Selecting P allows you to enter a default disk drive and path.
You can use this to choose a file area other than the one the EASY
MORTCOST program resides in. This can be a floppy disk drive or
any drive or directory on a hard disk.
If you choose to set a default drive/path, all data files,
including the input and output files, plus temporary working
files, will be read from, and written to that area (exception is
MORTCOST.CFG, described later). All file listings will also be
for that location. This saves you having to enter the drive
letter and path name when entering file names.
If you intend to load input files from different disk drives or
directories, you may want to leave or set this option blank. Then
you can enter the file names with explicit drive letters and
directory names in front of them.
The drive and path settings can only be changed from this option
of the main menu.
Selecting I and O allows you to enter a DOS default file
specification for input and output files respectively. Again,
this feature is optional. Leaving it blank will give a listing of
all files. DOS wildcards like * and ? can be used.
If you always named all of your input files with the same
extension, like LOAN1.INP, LOAN2.INP, etc., then you can set the
Input spec as *.INP and only those files will show when you do a
file listing. Similarly, you might name all output files with an
extension of .PRN or .OUT, which would make an Output file spec of
*.OUT useful.
- 7 -
The I and O file specs can be changed in other places in the
program where file listing functions are provided.
The current drive/path, and I&O file specs are saved in the
MORTCOST.CFG file when you exit the program, and will be available
for your next session.
2. MAIN MENU -- FILE COMMANDS (F, S, & L)
Three of the commands on the main menu, F, S, and L, are used for
data file storage and retrieval.
F is used when you want to calculate loan cost data and send the
output to a file instead of the printer or monitor. You can then
use the results file for other program input, or if you just want
to keep stored copies of your results on disk.
S and L are used to store and retrieve the input variables that
define a loan plan. After you have made all the necessary manual
entries of a loan plan into the computer using the data input
screens, you can then use S to save those inputs to an input disk
file, (one file for each loan plan). The L (for Load) command is
used to retrieve the file into memory.
When you save a file with the S command, you will be prompted as
to whether you want the file designated as PLAN A or PLAN B. This
designation is used in the Automatic Comparison Analysis option of
the program, and its presence here is just a shortcut to save you
from having to reenter a file name later. Once you become
familiar with the Automatic Comparison option, this will make more
sense. You can skip this without concern by just typing ENTER.
The description of the loan plan is saved in the input file with
all the other variables. The only way to change the description
within the program is to run the M, F, or P commands to compute
the output data, at which time you are prompted to provide a new
description or keep the current one.
All of the file commands throughout the program provide a file
listing functions to help you select file names.
3. MAIN MENU -- COLOR OPTIONS SELECTION (O COMMAND)
Selecting O will take you to the color options screen. If you are
just starting the program for the first time, or have somehow lost
the MORTCOST.CFG file (described later), then the first thing you
should do is select 1, 2, or 3 depending on your monitor type.
These each have preconfigured colors that will provide you with a
reasonably good start on color selections. If you wish, you can
then exit this section by hitting hit Q and those colors will be
used throughout the program.
- 8 -
If you wish, you can use the other commands on the screen to
customize the colors to your preference. 6 different
text/background color combinations are used throughout EASY
MORTCOST to represent different types of information. Examples of
the type of use of each color are displayed on the options screen.
To change a color, just type the letter that goes with the type of
text that you want to change, and you will immediately see the
effect.
Repeatedly typing the letter will cycle through all available
color combinations. Typing a capital letter changes the
foreground (text), whereas typing lowercase changes the
background. When you find a set of colors that you like, just
type Q to exit this menu.
The description of the text color types follows:
R Regular color used for most text and data output.
H Help color used whenever you select help by entering H.
M Menu color used to show what letters or numbers that EASY
MORTCOST will accept as input.
S Selection color. Used when you are typing in an input
value, filename, loan description, etc. When you see this
color, you either are entering that data, or you are at or
close to a menu where you can change that data.
T Title color used for Titles, data blocks, and column
headers.
P Prompt color is used when the program is telling you to do
something.
4. MAIN MENU -- DOS SHELL (E COMMAND)
If you type E from the main menu, you will temporarily exit EASY
MORTCOST. You can then run certain other programs while EASY
MORTCOST stays in memory. When you want to return, type the word
"EXIT" from the DOS prompt. See the section on the configuration
file MORTCOST.CFG for one caution about using the DOS shell.
5. MAIN MENU -- RE-ENTER ALL INPUTS (R COMMAND)
Typing R causes MORTCOST to present you with the entire list of
data input screens. It is used when you want to start from
scratch to enter a new loan, and is essentially the same as if you
restarted the program and typed G at the first screen. Because
- 9 -
typing R will wipe out all the variables that you currently have
in memory, EASY MORTCOST gives you one last chance before it
proceeds.
6. MAIN MENU -- AUTOMATIC LOAN COMPARISON ANALYSIS (A COMMAND)
Typing `A' activates the automatic loan comparison section of the
program. This is described in detail below.
F. AUTOMATIC LOAN COMPARISON PROGRAM
This option is used to compare two loans against each other to
determine which is the least costly.
>>IMPORTANT: Before using this section, you MUST FIRST create an
input file for each of the loans that you want to compare. This
is done by defining the loan plan on the MAIN MENU, and using the
Save command to store the inputs in a disk file.
1. AUTOMATIC LOAN COMPARISON -- INITIAL MENU
Upon entering the Automatic analysis section, you will be shown a
screen that displays the file names for the two input files that
you will compare, and the description of each loan as it was
entered with the MAIN MENU M, P, or T compute commands, before the
file was Saved.
Choosing A or B prompts you for a file name that will be "tagged"
as PLAN A or PLAN B respectively. The comparison will take place
between the two loans that are stored in the files designated as
PLAN A and PLAN B.
(Note: If you return to the main menu after you have designated a
file as PLAN A or PLAN B, and change any variables, or change the
file description with the M, P, or T commands, you must resave the
file before re-entering the Automatic Loan Comparison Section.
Otherwise, when you run the comparison, the information used will
be that from the last time you saved the file, not the most recent
changes).
The PLAN A loan can be either loan if you are doing a regular
comparison between two plans. It must be your current loan if you
are conducting a comparison to determine if you should refinance.
This is covered in more detail in the USING EASY MORTCOST section.
OFFSET is a value that you enter to control the type of analysis
that is conducted. If OFFSET is set at zero, EASY MORTCOST will
conduct a standard loan comparison between the two files that you
- 10 -
have designated as PLAN A and PLAN B. If OFFSET is set to any
value greater than 0, this switches MORTCOST into a refinance
comparison mode, where OFFSET is the number of years that have
already been used up on your original loan.
2. AUTOMATIC LOAN COMPARISON -- STARTING THE ANALYSIS
With OFFSET=0, when you type G for Go, EASY MORTCOST will ask you
which plan you want to control the tax and inflation assumptions.
For an accurate comparison, the same assumptions must apply to
each loan, and this screen gives you a choice. Once you select A
or B, that plan's tax and inflation assumptions will be used for
both PLAN A and PLAN B.
With OFFSET equal to a positive integer number, MORTCOST switches
into the refinancing comparison mode. PLAN B, must be the new
loan being considered for refinancing. PLAN B will also
automatically be chosen for the tax and inflation assumptions, so
when you prepare your loan input files, you should take this into
consideration.
In the refinancing comparison, when you hit G to Go, you will be
asked one final question, whether you want to use the remaining
principal from PLAN A for both loans. If you answer Y for Yes,
EASY MORTCOST will first calculate the remaining principal on your
current PLAN A loan, and then use that value for the PLAN B loan
also. This will give you an apples-to-apples comparison of the
interest rates and points effects of the two loan plans.
By hitting N for No or ENTER, the principal that you originally
entered for PLAN B will be used.
After this point, whether you are doing a regular or refinancing
comparison, EASY MORTCOST will begin the automatic analysis. This
can take a few seconds to a few minutes depending on the speed of
your computer. During this time, three temporary files are
written to the default disk drive area selected with the D command
from the MAIN MENU.
3. AUTOMATIC LOAN COMPARISON -- OUTPUT MENU
Once the comparison calculations are complete, you are presented
with a screen that asks you for the desired output. You may at
this point, direct the output to the monitor, printer, or an
output file. You also can select the amount of output you
receive.
If you choose 1, you will get a complete loan cost analysis of
both PLAN A and PLAN B, including any modifications that the
- 11 -
comparison program has made (ie, substituting tax and inflation
schedules from the other loan, remaining principal calcs,
accumulated refinance points, etc.). You then are presented with
a summary report that at first glance looks like the bottom third
of the regular MORTCOST analysis. This report, however, is
actually the difference in cost between PLAN A and PLAN B.
If you choose 2, only the summary report is written. You can
toggle between these two choices.
When you type Q to Quit the output menu, you are returned to the
Automatic Loan Comparison menu, and the temporary results files
are erased from your disk drive. Also, since EASY MORTCOST uses
routines from the MAIN MENU area to run its Automatic Loan
Comparison analysis, the data left in memory does not represent
either of your base loan plans. Therefore, to avoid confusion
when you return to the MAIN MENU, the variables that are in memory
will be reset to zero when you Quit. If you intend to rerun a
loan cost computation from the main menu, you must reload the loan
variables (by using the L command).
- 12 -
U S I N G E A S Y M O R T C O S T
A. COMPARING THE COST OF TWO OR MORE LOANS
When you talk to a banker about a new mortgage, collect all of the
information that you can about the interest rates, the "points"
that the bank charges, and their direct costs like attorney's fees
and inspections, for each of the loans that you are considering.
Enter the inputs into EASY MORTCOST, using commands from the main
menu screen to check the inputs, alter them as needed, and
conduct a single loan cost analysis with M or P to be sure that
you are satisfied that each loan plan is correctly described.
Save each loan that you wish to compare to another in an input
file with the S command.
Go to the Automatic Loan Comparison Option. Select one of the
input files as Plan A, and a second file as Plan B. Type G for
go. Choose the plan that you want to control tax and inflation
assumptions. If both of the loans that you are comparing have
the same tax and inflation tables, it doesn't make any difference
which you choose. Now hit ENTER.
At this stage EASY MORTCOST takes over. It performs a complete
loan cost analysis on each of the two plans, similar to what you
would have done if you had run the analysis from the main menu.
A few things are done differently, however.
As alluded above, the tax and inflation assumptions will be the
same for both loans, based on which of the two you chose to
control both loans. If this were not done, and your two loan
input files had different tax and/or inflation schedules, the
results would be very misleading.
Another difference is the manner in which EASY MORTCOST handles
two loans of unequal length. For example, if Plan A were 20 years
long, and Plan B were 30 years, you might wonder how you compare
the cost of Plan A to Plan B at 25 years. EASY MORTCOST handles
this by assuming the cost of the shorter loan at 20 years
represents the total cost of that loan at any time after 20 years
. . . after all, at 21 years, you haven't spent any more money on
that loan than you had the year before.
Following the same line of reasoning, the cost of the loan in
current dollars for Plan A will not decrease after 20 years, even
though the overall cost of money in general would be decreasing
because of inflation. The reason that this is correct is that you
had to pay for the loan with the cost of money at 20 years. That
expenditure was already sunk by that year, and it isn't going to
cost you less in future years.
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B. AUTOMATIC COMPARISON OUTPUT DESCRIBED
The output from the Automatic Comparison option resembles that
which you get from the main menu, but their are some important
differences. First, if you select output option 1, you will get a
full listing of Plan A and Plan B. But these listings will
reflect all the special modifications that were described in the
last section.
For example, both loans will have a cost summary that is based on
the length of years for the LONGER or either Plan A or Plan B.
And you will note that the shorter loan will make up those extra
years by just copying the cost of the last actual year of that
loan (this represents the discussion on sunk costs two paragraphs
back).
Also you will note that the tax and inflation assumptions for
both plans are now set equal to whichever loan you chose as the
one to control those variables (or Plan B for refinance
calculations, as described below).
After receiving the cost analysis of each loan, you will be
presented with the important SUMMARY COMPARISON REPORT.
This report takes the cumulative cost totals from each of the two
plans, and subtracts the costs of Plan A from Plan B. (A detailed
discussion of all these outputs is covered later in the
documentation),
C. INTERPRETING AUTOMATIC COMPARISON OUTPUT
As noted on the output form, you can now easily determine the more
costly loan at any year. If the dollar value is positive, you
know that, at that point, Plan B is more expensive than Plan A.
Conversely, if the value is negative, Plan A is more expensive
than Plan B.
By simply observing whether the values are positive or negative,
you can easily determine which loan is the more expensive one, and
by how much, at any point in time.
The annual loan cost columns (leftmost pair) show the actual cost
of the loan for a given year. The cumulative loan cost (center
pair) is the running total of the annual loan costs. A loan with
high up front costs but a lower interest rate may be more
expensive initially, but when the cumulative cost passes through
zero and the dollars switch sign (+ or -) then that loan has
become less costly.
The third pair of columns, entitled CUMULATIVE COST MINUS
PRINCIPAL PAYMENTS can be helpful if you want to compare two
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loans, and you think that you might not use use the entire length
of the mortgage. For example, you might expect to be transferred
by your company, or buy a bigger house, maybe 7 years from now.
At that time, you'll sell the house, so the rest of the mortgage
cost is meaningless. In this case, you should look at the costs
of the loan at 7 years.
Furthermore, the portion of your monthly payments that have been
applied to reduce the loan principal will be returned to you when
you sell the house. This net cost is reflected in the rightmost
pair of columns. Therefore, you may want to look at the CUM. COST
MINUS PRINCIPAL PAYMENTS columns when comparing the loans.
D. FOR HOW LONG SHOULD A LOAN BE WRITTEN?
Have you ever heard someone say that it is always best to get the
shortest loan possible, if you can afford the payments? Then you
might be surprised to learn that sometimes it may really be better
to get a longer loan. In fact, the December 14, 1994 issue of
Strategic Investment newsletter shows investment advantages of
taking out a 30 year mortgage instead of a 15 year one, provided
that you are disciplined about investing the difference between
the payments.
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 finishes, 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.
Using EASY MORTCOST helps you compare those differences. Using
the Automatic Loan Comparison option, you can quickly determine
if the loan company has structured a longer loan such that it is
less expensive.
The effect of inflation can also have a significant effect on
the choice of the length of a loan. See the next section on
inflation for more information.
E. HOW DOES INFLATION AFFECT A MORTGAGE?
To show how inflation figures affects mortgage costs, think of the
older folks who are paying less than $200 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 their house
payment.
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With inflation, as the loan gets older, it takes less "real money"
to make the house payment. In other words, we all know that
because of inflation, it takes more dollars to buy the same
product now than it did in 1980. The reason is that the value of
the dollar is less now than it was in 1980. The same effect
applies to your house payment. If your payment is the same ten
years from now as it is today, and if your salary has risen with
inflation, then the payment will be easier to make.
One way to consider this effect is to calculate future costs of
the loan in "current dollars". EASY MORTCOST will handle this
calculation automatically, using your estimate of what inflation
will be.
Using this feature, EASY MORTCOST can help you decide between a
short vs a long mortgage or loan. Occasionally, but certainly not
always, and depending on inflation and the loan interest rate
schedule that you predict, 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. That is because the dollars that
you spend in the future just aren't worth as much as the ones that
you spend today. The real value of the money is shown in the
columns "ADJUSTED FOR INFLATION."
EASY MORTCOST's Automatic Loan Comparison Option always insures
that the assumed inflation schedule for both loans being compared
is the same. To see how inflation affects loan costs, refer to
the SUMMARY COMPARISON REPORT. Instead of looking at the cost
comparison in the columns labeled "NOMINAL", look instead at the
columns labeled "ADJ. FOR INFLATION". These report the costs
differences between the two loans, expressed in terms of the value
of today's money.
F. 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, such as added
interest points and closing costs. MORTCOST helps you decide if
it is a good investment to pay these costs to get the lower
interest rate, and let you know how many years it will take to
break even and start making more money with the lower rates.
There are a number of special calculations that must be done to
conduct an accurate refinancing. Luckily, EASY MORTCOST does them
all for you. These calculations will be explained here, so that
you know what is happening.
As with a comparison of two loans for first financing, you should
collect all of the information that you can about the interest
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rates, the "points" that the bank charges, and their direct costs
like attorney's fees and inspections, for the loan that you are
considering to refinance to. Also, if you have not already done
so, you should obtain similar information for your current loan.
Your current loan and each loan candidate for refinancing are
prepared and checked out with the main menu, as you would for
regular loan comparisons as discussed in section A above.
Next go to the Automatic Loan Comparison section of the program.
This time, you MUST designate your current loan as Plan A, and the
refinancing candidate(s) as Plan B. Furthermore, Plan B will
automatically be used to establish tax and inflation assumptions
for both loans.
Now you must select the OFFSET year. OFFSET is defined as the
number of years that you have already paid on your original loan.
Or you can also look at it as the total length of the original
loan minus the number of years that you have left to pay.
The OFFSET parameter does two things. First, setting it to any
positive integer other than 0 acts as a switch to tell EASY
MORTCOST that you are conducting a refinancing analysis.
Secondly, OFFSET establishes where you are in your current loan,
so that a comparison to a new loan can be made on a head to head
basis from now on.
Having selected the two loans as Plan A and Plan B, and setting
the OFFSET year, you may now type G to go. You will be asked if
you want Plan B principal to be reset to that which remains at the
offset year for Plan A. This choice depends on what your
objective is.
If you are interested in comparing your current loan on a head-to-
head basis with the refinancing candidate, looking at whether the
effective interest rates differ (including other cost factors),
then answer YES. EASY MORTCOST will then use the same loan
principal for both loans (the amount that remains on your current
loan), which gives this direct comparison of the cost structure.
The principal that was in the input file that you designated for
Plan B will be ignored.
If, on the other hand, you want to insure that EASY MORTCOST uses
the principal of the Plan B loan just as you saved it in its input
file, then just type N for no, or hit enter. This option allows
you to choose to refinance more or less than what the principal
that remains on your current loan, and see what the cost is.
Once you make this selection, EASY MORTCOST's Automatic Loan
Comparison option goes to work. First, it loads Plan A (your
current loan), and using the OFFSET year, determines how much
remains to be paid on that loan. Next it loads Plan B, and does
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a complete loan cost calculation for it. Now, keeping the tax and
inflation schedule of Plan B constant, it reloads the portion of
Plan A that must still be paid, with the principal remaining.
The new loan for Plan A is now a shorter loan that is equivelent
to what remains on your current loan (same monthly payments).
EASY MORTCOST also has the capability to correctly handle the tax
deductibility of loan points when you refinance a loan that has
been previously refinanced. As discussed on the input screens,
when you refinance, you must deduct the points over the life of
the loan, instead of taking the tax deduction in the first year.
When Plan A has these types of points included, the deductibility
of those points is retained in the new shorter loan based on
remaining costs. Furthermore, if you refinance an already
refinanced loan, you can deduct those points that you previously
had to spread out, in the year of the second refinancing.
If this last situation occurs, Mortcost will include these
leftover points from Plan A as a deduction in the first year of
Plan B, and include the added tax benefit if you chose the Plan B
option. For clarity, an extra message will be printed on the
comparison output identifying the source of the additional
deduction.
When EASY MORTCOST is finished, the SUMMARY COMPARISON REPORT
lists the difference between the remaining years of your current
loan and the new loan candidate. This analysis 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
refinancing, (you may not expect to be in the house long enough),
as well as which refinancing plan is best for you.
G. INFORMATION ON INCOME TAX DEDUCTION CALCULATIONS
Current U.S. federal tax laws permit a deduction for loan interest
charges on your first and second home. If you choose to itemize
deductions on your income tax return, this interest deduction
reduces your total loan cost. The amount of the deduction will
depend on your tax bracket, length of loan, interest rates, and
loan interest points.
There can also be limitations on deductibility for so called "home
equity loans" where the proceeds of the loan are used for purposes
other than the home purchase. Always check the current tax laws
to determine what is really deductible for your situation.
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 income that you would make over your current income.
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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.
If you can deduct your mortgage interest from your particular
state income taxes, you can adjust the tax bracket by adding your
state tax bracket to it.
MORTCOST automatically subtracts the tax deduction from the
computed loan cost, based on the tax bracked schedule that you
input. If you want to ignore the tax bracket calculation, just
set you tax bracket at zero.
If you set the tax bracket to zero and remove loan points and
direct costs, MORTCOST will produce the same simple amortization
tables that you see in other mortgage programs.
H. HOW DO I 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 admittedly
somewhat guesswork as to what inflation will be like in the
future.
Since MORTCOST makes it very easy to change inputs and rerun the
program, you can experiment with different assumptions quickly to
see what effect they have. For example, run your loan candidates
at a conservative estimate and a liberal estimate for inflation.
If you believe that you might be getting a raise which will
increase your tax bracket, test out what effect that will have.
You will probably find that some loan plans will look good or bad
no matter what assumptions you make. Others may be more sensitive
to your assumptions. You have to make the final decision, but
MORTCOST is the tool that let's you make that decision
intelligently.
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I. DETAILED DESCRIPTION OF THE OUTPUT
Three abbreviations are used in the output to conserve space:
FEY (For Entire Year) refers to values that apply to the entire
year listed.
SOY (Start of Year) refers to values that apply to the beginning
of the listed year.
EOY (End of Year) refers to values that are correct at the end of
the listed year.
Listed output:
YEAR is the year number of the loan as described previously.
TAX BRKT is the income tax bracket that you entered as a
percentage.
INFL is the inflation rate that you entered, as a percentage.
LOAN % is the interest rate from which the calculations are made
in any given year. It is assumed to act on the remaining
principal of the loan at the start of that year. It is not
possible to input an interest rate for a split year, but if you
round to the closest year that the interest rate changed at, you
will still get comparisons between loan plans that will be close
enough to make decisions.
SOY POINTS are the percentage value (of the loan principal at the
start of the year) of extra interest charges (some banks refer to
them as closing costs) that are eligible for a tax deduction.
They are assumed to apply to the loan at the Start Of Year, so
that they can be deducted for that year's taxes.
ORIG. refers to points that can be deducted from your
taxes in the year that they are paid. This applies to
points charged for a loan used for purchase of a new home,
or remodeling an existing one.
REFIN. refers to points that must be deducted by a
straight line method over the length of the loan. The IRS
wants you to do that if you are refinancing an existing
mortgage.
$POINTS are the calculated extra interest charges based on the
interest rates that you entered in the SOY POINTS column. The
costs of ORIG points and REFIN points will both be shown here in
the year that they occur.
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$DIRECT SOY are non-deductible direct costs of the loan that you
have entered, such as attorney fees, title searches, title
insurance, etc.
Note: Ask the bank that is trying to sell you the loan to tell
you which of their charges are deductible (enter as POINTS), and
which are non-deductible (Enter as DIRECT). Sometimes you have to
really pin them down on this.
MONTHLY PMT. is the calculated monthly payment you will make on
the loan, principal and interest included. It should be the same
as the bank told you your payment would be, or else the input is
wrong or they have some strange way of calculating your payment.
LOAN INTEREST is the sum of the interest portion of your 12
monthly payments during any given year. This is assumed to be tax
deductible.
DEDUCT. PTS. Is the dollar amount of the points that can be
deducted in any given year. ORIG points will show here in the
year they are paid. REFIN points will be spread over the entire
remaining portion of the loan, as per current IRS guidelines.
TAX DEDUCT is the estimated income tax deduction that you should
receive if you itemize your deductions. It is based on your input
tax bracket, multiplied by the total of the loan interest charges
and deductible points. Keep in mind that MORTCOST works on whole
year calculations. If you actually start the loan in mid-year,
you can only deduct what you actually paid in interest and points.
MORTCOST is a loan comparison tool. It should not be used as
input to your IRS 1040 form.
PRINCIPAL PAID is the sum of the principal portion of your 12
monthly payments during any given year.
PRIN. LEFT is the amount that you still owe on the loan at the end
of the numbered year.
In the next section, each value is listed both as NOMINAL and ADJ.
FOR INFLATION. Nominal is the dollar amount as calculated,
without any modification for inflation. ADJ. FOR INFLATION has
the numbers divided by the continuous product of 1 times the
inflation rate that you entered, such that the result is the
actual value of the money in that year as given in "current
dollars."
ANNUAL LOAN COST is the sum for any year of principal,
interest, points, and direct costs, minus the tax
deduction expected for that year.
CUMULATIVE LOAN COST is the running total of the annual
loan costs, very useful to compare two loans year by year.
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CUM. COST MINUS PRINCIPAL PAYMENTS is what it says, the
CUMULATIVE LOAN COST minus the total PRINCIPAL PAID during
a year. This calculation reflects the fact that if you
sell your house before you reach the end of the loan, you
should receive some portion of your principal back as part
of the sale price of the home. A loan that reduces
principal at a greater rate means that you get to keep
more of the sale price of the home when you close out the
mortgage. For this reason, these columns make a better
comparison of loan costs if you anticipate selling the
home before the entire loan is amortized.
J. PROGRAM LIMITATIONS
So that it doesn't write a book, EASY 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. For this same reason, you
should not expect that the principal remaining value at the end of
a year as given by MORTCOST will exactly match that of your
mortgage records.
Adjustable Rate Mortgages (AMRs)
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, raising
or lowering the monthly payment. This is the type of AMR that
MORTCOST can calculate.
A few flexible mortgages are written so that the payment remains
constant no matter what. If interest rates go up, you can
actually have negative amortization (the amount you owe
increases). MORTCOST does NOT analyze this type of flexible
mortgage.
Maximum Loan Size
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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T E C H N I C A L T O P I C S
A. CONFIGURATION FILE (MORTCOST.CFG)
When EASY MORTCOST is loaded, it checks the DOS default directory
(not to be confused with the default directory that is set within
EASY MORTCOST with the D command), to see if there is a small file
on the drive named MORTCOST.CFG. If it is not found, MORTCOST
assumes a default configuration, with monchrome color.
When you exit the program, EASY MORTCOST again checks for the
presence of this file. If it is not there, it will create a new
MORTCOST.CFG file on the DOS default drive. This file stores your
user selections for color choices, as well as the default data
directory and the input and output file directory specifications.
If EASY MORTCOST finds a copy of MORTCOST.CFG, it checks if it has
changed since last written, and only writes a new one if changes
have occurred.
Since MORTCOST.CFG is stored on the default directory, you should
try to start EASY MORTCOST from the same directory every time it
is used. Otherwise, you might end up with extra copies of
MORTCOST.CFG in other places on your hard drive. (They won't hurt
anything, however).
Also, if when you use the DOS SHELL command from the main menu,
and you change directories or drives while you are outside of EASY
MORTCOST, you should try to return to the original directory when
done, or again, you will get an extra copy of MORTCOST.CFG when
you exit the program.
B. TEMPORARY FILES
When EASY MORTCOST does an Automatic Loan Comparison, it will
write 3 temporary files to your MORTCOST default drive. The
filenames have been intentionally chosen to be weird, so that EASY
MORTCOST doesn't overwrite one of your other important files. The
names of the three temporary files are AOUT#Q9P.#-_, BOUT#Q9P.#-_,
and DOUT#Q9P.#-_.
These three files in total will occupy up to 35 kbytes of drive
space. Therefore, the MORTCOST default drive must have that
much free space on it to run the Automatic analysis.
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C. MEMORY REQUIREMENTS
The memory requirements for EASY MORTCOST are small, but if you
try to load the program and encounter an error code 7, you have
run out of memory. If you have a lot of memory resident programs
or print spoolers loaded, you might have to unload them to run
this program.
D. 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 regular
MORTCOST, 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.
E. ACKNOWLEDGEMENTS
IBM PC and PC-DOS are registered trademarks of International
Business Machines, Inc. MS-DOS is a registered trademark of
Microsoft Corporation.
F. ABOUT QUINN SOFTWARE
Quinn Software is registered with the Illinois Department of
Revenue as a retail business. Our I.D. no. is 2178-5155. We
recognize that this documentation, once released into public
distribution, could be available for many years. While at present
we have no plans to relocate our business, should we do so at some
future year, we will notify the Illinois Department of Revenue of
our new location. Also look for updated versions of this
documentation on the CompuServe online information service, in the
IBM software area.
Date of Documentation: 29 DEC 94
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