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. __ 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. __ 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. __ 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. __ 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. __ 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. __ 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. __ 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. __ 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. __ 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. __ 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. __ 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. __ 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 __ 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). __ 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. __