# The StrawStickStone Mortgage Scenario Analysis Calculator

This is my new favorite entry EVER.

## Let's Play!

I've spent the past week explaining why it's so important to do serious comparison shopping and saving up before you apply for a loan. On Monday we investigated how you could save up to 35% over the life of your loan by working with discount points and down payments. On Wednesday I used a salad dressing analogy to explain APR and how it affects your bottom line. For today I've gone back to my nerdy coding roots and have made a pretty hefty calculator so you can play with the numbers yourself.

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# Balsamic Vinaigrette, Buttermilk Ranch & Your Mortgage.

So I was at McDonald's today. (Bring it on, indignant foodie brigade! You'll pry my french fries out of my cold, greasy, dead hands.) I was confronted at the palais de graisses saturÃ©es with the "Under 400 calorie" menu that they've rolled out to go with the 2012 London Olympics. A copy is below in case you've not sullied yourself with such things lately.

The McDonald's "Under 400 Calorie" menu. This will make sense in a moment. Click to super-size me.

It was the salads that caught my eye. Maybe not for dinner, but for the purposes of explaining this article. Because salads - or rather, salad dressings - make a wonderful analogy for explaining APR and interest rates.

## Salads are Kind of Complicated.

So, you get your basic side salad and it's 20 calories. You nibble, you gain very little weight, you feel full, end of story. But a salad of just iceberg lettuce, cucumber slices and a couple of cherry tomatoes won't get you featured in Time Out Magazine. People start getting creative. The good folks over at "Cooking Light" explain in a nifty slideshow how a restaurant salad can quickly rack up over 1500 calories, not to mention the fat & sodium involved. The more stuff you put on your salad, the more time you'll have to spend at the gym later to work it off. But it's so easy when you're ordering the salad to say, "OK, I can have these croutons now, it's no big deal."

We've been doing this for so long that it's become a clichÃ© - "a minute on the lips, a lifetime on the hips."

If you're working with a weight loss deadline - say, swimsuit season or trying to squeeze into a fancy halloween costume - suddenly the amount of exercise you'll have to do to neutralize the ranch dressing gets compressed into a far shorter time period. 500 extra calories is a lot harder to work off in a week than slowly over a few months. You start giving some thought to your order. Hold off on the croutons, swap out the buttermilk ranch dressing for a low-cal balsamic vinaigrette.

## From Our Lettuce to Your Cabbage.

So when you go to buy money from a bank or a mortgage broker, you're faced with a situation very similar to ordering a salad. Every lender will offer you a different base interest rate - that's like every restaurant offering you a different combination of vegetables on a bare, undressed salad. Some banks will be small local ones, others big national ones, just like some salads are organic & locally grown while others are covered in pesticide & imported from Mexico. It's your choice as to which way you want to go.

Beyond the basic lettuce, though, there's all of the extras consider. When dealing with salad, you're talking about dressings, croutons, and maybe those tasty little sesame sticks. In the case of the other green stuff - borrowed money - it's all of the lender's assorted fees & commissions. And in the lending world, all of that stuff found in the difference between the interest rate and the APR.

Lenders charge to give you a loan. They are selling money. They have to turn a profit. They may say it's a "no-fee" loan up front to get you talking to them, but the fees may actually be wrapped up in your monthly payments instead. The government has recently started requiring restaurants to disclose the calorie content of their dishes. Similarly, the Truth in Lending act requires lenders to disclose any hidden fees that you will be required to pay, either at closing or folded in.

I'll give you an example.

This image brought to you by lots of pounding on Excel very late at night.

That chart above explains it nicely. But there's a problem. See, the APR they disclose to you is based on the thought that you'll be in the place for the entire life of the loan. Most people are not planning on staying in their home for 30 years even though they get a 30 year mortgage. So while it's all well and good that the banks are disclosing their APRs to us, it doesn't really matter if you're planning on taking off much earlier.

## Shorter-Term Loans are Kinda Complicated, Too.

Remember when I started talking about dieting on a deadline up above? That's coming back now. Just like that 1500 calorie salad is a lot more of a challenge if you're trying to drop 20 pounds in a short time, the actual APR that you would be taking on will be much higher than the quoted amount of you're planning on paying off the loan in, say, 7 years.

You're still borrowing \$50k plus \$2k in finance charges. You're still going to have to work off those extra calories - the finance fee salad dressing, if you will - but you'll have less time to do it. Remember, you still have a loan for \$50,000 at 3% interest. But with the finance fees included you're suddenly paying off the balance plus the fees in a shorter amount of time. \$2000 spread out over 84 months is a lot tougher than \$2000 over 360 months.

Let's take a look at what the real APR would be for someone who leaves after 7 years. I've done another handy chart below.

If you're planning on staying for a short time, the quoted APR that the bank has to give you will not mean a whole lot. This chart explains why.

In Monday's article, the savings from paying discount points and a higher down payment at closing increased with a longer stay in the property, from 9% after 5 years to 35% over the life of the loan. This is also true for APR. The longer you stay, more fully distributed those fees will become, and the closer your real-life APR will get to the numbers quoted by your lender. It will take you less time to get to your break-even point.

## Wrapping it Up to Go.

It's best if you can find a mortgage broker with no difference between the actual interest rate and the APR. However, if the best interest rates you get are quoted by lenders that are going to charge you fees, make sure you calculate your own actual APR or talk with your Realtor, accountant or a neutral and mathematically gifted individual to figure out if the cost in fees will be more than the difference in quoted rates.

Let's look at another handy chart to help explain what I mean.

Don't get all excited about a low interest rate if you're going to be paying through the nose in financing fees. Give some thought to how long you're planning on keeping the property before you start shopping for a loan.

So next time you see APR don't be confused and don't mentally check out of the conversation. Lenders are going to rely on you being both a) confused by the term and b) too ashamed to ask what it means. For a high-cost lender to voluntarily explain APR to you in a clear manner would be shooting themselves in the foot. Just remember when the term comes up that it's like figuring out what to get on your salad. High APR is like high-fat dressing. The best thing for your financial health is to stay away from the extras and find the most basic, low-fat loan you possibly can.

(Aren't you proud of me? I made it all the way through that without a single "bacon bits" pun!)

# How to Save 35% on the Total Cost of Your Home

Stand back, all my darling practical piggies, because I'm going to do math for you again and it's going to be fabulous.

Today's delicious math is performed with the end goal of explaining why you really do need to shop around for your mortgage, and why you need to do so before you start shopping for a home with a Realtor.

See, if you're buying a home and I'm representing you, my job is to negotiate the lowest possible price. We Realtors do pretty well at the whole negotiation thing. According to MRED's MLS, the final sale prices of homes in Chicago over the past year have been about 10% less than their final list prices. 10% is nice. I got 25% off for one of my buyers this year and felt pretty darned pleased with myself for doing so, but it was a special & extreme circumstance.

But the true cost of a home isn't just the purchase price. What about the closing costs and interest payments that you'll rack up over the life of your loan? Unless you're paying cash only, you're going to be paying out quite a bit more for the privilege of borrowing someone else's money. I do everything I can to get you the lowest purchase price, but how much you actually pay? That's up to you.

By planning ahead, saving a good down payment and working the details of your mortgage you could save 9% on the total money spent after just 5 years in your home. By year 10 that savings is up to 21%. If you stayed in the home for the full life of the loan you would save 35%. That's more than you'd save in any sort of negotiations over the actual purchase price, and definitely more than the piddly 2.5 to 3% you'd purportedly save on just the purchase price by going without an agent at all. (more…)

# Cook County’s early 2nd installment property tax bills: What does it mean for you?

Even shorter version: taxes are due early. Great for schools, awful for homeowners.

The 2nd installment of Cook County Property Taxes is due on August 1, 2012 instead of in the late autumn as they have been for years. This is a total WTF moment in the history of Cook County property ownership and deserves a nice thorough review. The short version is that many Chicago and Cook County property owners are going to have to come up with a bunch of cash very quickly. Read on to find out if you're one of the lucky thousands, and to learn why we're in this kind of a pickle.

## The Passive-Aggressive County Boards and You.

As I've briefly touched on before, the determination of property taxes in Cook County (and by default in Chicago) requires multiple parts of the county government to be singing from the same hymnal. Unlike most US counties where property taxes are paid in two equal parts, Cook County is a special snowflake. Because of a year of tax forgiveness back in the 1930s which may or may not have actually occurred, Illinoisans pay property taxes a year behind. A few other midwestern states do this but it isn't a national tradition. But for Cook County, this year (2012) homeowners are paying for the taxes that they racked up in 2011. Remember this, it becomes important later on in the story.

# Weekend Links for June 30, 2012

[Generation rent cartoon courtesy of The Downward Spiral.]

From my browser to yours comes the 2nd installment of the StrawStickStone weekend links!

• Journey to the center of the earth: MentalFloss (a personal favorite of mine) ran an excellent article this week about air rights and underground rights for homeowners.
• Introducing "Generation Rent." HuffPo has a great article about the surge of young adults who are moving to/staying in the city and choosing convenience & renting over the suburban homeowner lifestyle. Faced with uncertain career prospects and rising energy costs, the foot-friendly cities are giving rise to a new generation with very different cultural values.
• Why yes, Realtors can help with Rentals. A recent "Real Estate Matters" column from the Tribune serves as a great reminder that Realtors are in the housing business, not just the home sales business.
• What's included in your mortgage's APR? I had a great conversation with one of our office's in-house mortgage lenders this week about the hidden fees that can be rolled into your mortgage. Sometimes those fees can mean the difference between a good loan and a great one. Find out what makes up the difference between your interest rate and your APR with some guidance from AmericanLoanSearch.com.
• Early property tax bills in the mail for Cook County. Cook County Treasurer Maria Pappas has announced that 2nd installment property tax bills for 2011 will be in the mail this month and due August 1. In previous years the bills have always been late, with due dates sometime in the fall. The bills have been late for so long, in fact, that most bank have come to expect an October or November due date, as have most title companies. This sudden burst of punctuality will mean that most escrowed property tax accounts will come up short, and that any property tax prorations included in home sales for the first half of this year will have been incorrect. Stay tuned for StrawStickStone's take on the mess this coming Wednesday, but for now find out more at the Sun-Times article.
• Rowing for cancer survivors. A former tenant that I placed in two apartments is on a quest to fund her non-profit. Jenn Gibbons is founder and coach of Recovery on Water, a Chicago based not-for-profit rowing team for breast cancer survivors. Jenn formed the group in response to research that physical activity helps reduce the chance of breast cancer recurrence. This summer she is rowing the circumference of Lake Michigan solo to help raise money for ROW. Follow her adventure and make a contribution to the cause at Row4row.org.

Do you have a link to a real estate or Chicago-related item that you'd like me to share here? Let me know!