Paying off Your Mortgage Early–A Calculator

I’ve been arguing with a commenter on an earlier post about the merits of paying off one’s mortgage early. In that post and in its followup, I offered the idea that you’re often better off not paying off your mortgage early, from a pure “numbers” perspective. The commenter, who sells a “solution” to paying off one’s mortgage early, apparently disagrees.

I took a bit of time to create a spreadsheet to answer this question. I hope to change this from an argument between me and a commenter to a question of “what the numbers say”. You can enter your own inputs, validate the spreadsheet, and see the results for yourself. The spreadsheet assumes a 30-year, monthly mortgage. I invite anyone to point out minor flaws or glaring errors in the calculator, its assumptions, or the calculations.

My spreadsheet attempts to answer the question: if you have $X dollars a month (where X is your mortgage payment) and sometimes have extra money to either invest elsewhere or pay down the mortgage, what are the effects of the two choices on your net worth? The answers vary according to the assumptions used. However, I think using realistic numbers you’ll generally find that you’re better off investing the money in an IRA than you would be prepaying your mortgage.

The calculator’s inputs are mortgage APR, principal, tax rate, and investment rate of return. Assumptions include:

• The “alternate investment” is a Roth IRA, a wise move for many and an assumption that simplifies calculations. It gives no immediate tax benefit, but returns compound and can be withdrawn tax-free.
• The investor has adjusted his tax withholding to account for the deductions that mortgage interest provides. The extra cash flow from decreased withholding is invested in an IRA.
• If the investor prepays the mortgage, “mortgage payments” at the end of the period are invested instead of going toward mortgage payoff.
• Any time the investor makes an extra payment toward mortgage principal, that money could alternatively have been invested in the IRA.

I’m attaching I will attach, once I figure out how how to do so in WordPress, the calculator. Plug in your assumptions, and see for yourself whether your net worth would be higher if you prepaid your mortgage or if you instead invested that money in your IRA. I invite “Investment Strategies” or anyone else to critique this model.

Update 2008-09-17: Apparently, hosted WordPress doesn’t allow attaching Excel files. However, the file should be accessible through MediaFire, a free (and ad-supported) file-hosting service that I’m now trying out for the first time.

Stolen iPod

My car was burglarized sometime between Friday night and this morning. On the off chance someone happens to search on the serial number, the stolen iPod’s serial number is JQ549G67SZA. For others in similar situations, check out the Find Your Stolen iPod’s Serial Number article.

Filling out forms for $.80/hour

I read a while ago about the single-question customer-satisfaction survey, one that’s basically described here. Basically, the question is: “Would you recommend us to someone else?”. It’s simple, it’s easy to take, and it provides valuable feedback. The single question is a pleasant surprise to customers who may be used to…ah…the other kind of surveys, which I just noticed the linked document also talks about. This latter kind seems rather common in “real life”.

A week or two, I ate at Chili’s, and noticed their receipt’s bold offer to enter me in a contest–if only I visited their website and filled out their brief satisfaction survey. Although the odds may be vanishingly small, I had a spare moment, and visited the site, entered my code, and hit “go”.

A screenfull of answers later, I hit the “next” button. The survey’s progress indicator moved slightly toward completion.

A minute and another screenfull of answers later, I hit the “next” button again, and the progress indicator went up by another twentieth.

I stared in disgust at the progress indicator, closed the survey window, and got on with living my life.

I laud Chili’s for wanting to satisfy their customers. Entering them into a drawing when they fill out the surveys is a nice touch, and might raise the response rate just a bit. I question, though: why would a restaurant even want feedback from the kind of people who spend 20 minutes filling out a mind-numbing survey to get an almost-zero chance at winning a drawing? Do they really need to know that the presence of three softball teams made service a bit slower than usual, the iced tea was good (5, totally wholeheartedly without question agree), and that the experience was, on the whole…quite ordinary–but that the survey-taker has an uncontrollable urge to force a salt-shaker down the throat of the sadist that created the survey?

The next question: why would a person take the time to fill out one of these things? Wal-Mart, it seems, has followed in the blessed footsteps of Chili’s, and is printing magic codes and survey URLs on their receipts. The prize for their contest: they’re giving away five $1,000 gift cards! If we assume that the contest gets 100,000 entries (I’m guessing that number’s low, even given the torture one has to go through to enter), that’s an “expected value” of $5000/100000, or 20 cents. Wal-Mart cheerfully assures us that the survey shouldn’t take more than 15 minutes, so multiply that by 4 to get an expected value of…80 cents per hour. You’d do a lot better flipping burgers–and have a lot more fun!

It seems the dataset generated by this kind of survey has to be relatively small, and of even less worth for decision-making than its size would indicate. Only the ecstatic customers, customers contemplating Vengeance on the company, or the profoundly bored will run this gauntlet of verbiage to submit a survey. The resulting dataset must be hideously distorted. I’m not sure that one question is really all that’s needed on a survey, but to companies who want to give me virtually nothing for 20 minutes of my time: you’ve gotta be kidding!

Elephants: Myopic Fools?

As most readers are well aware, the elephant is a political symbol in the States, a symbol of a party that I once thought represented many values with which I agree. If elephants had sentience and legal standing, I’d expect them to be suing for misappropriation of their image, and for damage caused to their reputation.

This is a political-opinion post. More accurately, this is a post expressing outrage at the myopic fools in the White House and in my state’s Congressional delegation. As with any such post, balancing arguments likely exist. Please let me know what they are.

Several simple facts:

• President Bush asserts that “to reduce pressure on prices, we need to increase the supply of oil, especially oil produced here at home”.
• The EIA estimates that, through 2030, “Because oil prices are determined on the international market…any impact on average wellhead prices is expected to be insignificant”. They estimate that opening up the the OCS will ramp up to an increase in lower-48-states production by 2030 of…wait for it…200,000 barrels of oil, or almost one percent of current US petroleum consumption (20.7 million barrels).
• The EIA estimates that opening ANWR to drilling would provide an additional 2.6 billion barrels in the mean case and 4.3 billion in the best case between 2018 and 2030–or 130 days and 215 days respectively of oil consumption in that time, assuming consumption stays constant. Put in other terms, this would be about 4.5% of US consumption in that time period. They estimate that production would peak in 2028. This added production, they project, would lower oil prices by a dramatic $0.75 (mean case) to $1.44 (high-production case) per barrel of oil. Note that that’s not per gallon of gas; it’s per barrel of oil, or 0.6% to 1.15% off of the current $125/barrel price. If $4 gas went down by the same fraction, it would plummet to $3.96! My gas-rewards credit card gives me multiple times that fraction!

Everyone seems to be talking about the need to reduce dependence on foreign oil. I agree fully with the sentiment; it’s ridiculous to be funding autocratic regimes with our energy dollars, and giving them a chain by which to lead us in our dependency. It’s difficult to see, though, how decreasing our dependency on imports by a few percent improves our situation substantially. It’s difficult to see how encouraging consumption helps our economy or our national security. (“Yes, those crack dealers are bad, bad people. Tell you what…here are some coca seeds and instructions for refining the cocaine; you won’t need to buy as much. And, to tide you over until the plants grow, I’ll subsidize your purchases for a while.”)

Our vehicles don’t know whether they’re using American oil or Saudi oil, and neither does our national demand for oil. We could indeed begin drilling, and add a slight amount to global supply after a few years have passed. If we do so, we’ll have succeeded in prolonging demand for oil (consuming imported oil in the meantime), and may manage to maintain consumption at close to current levels until we find ourselves in 2030 in essentially the same situation we are now. Is this reduction of dependence on foreign oil?

We could also reduce dependence on foreign oil by exploiting oil shale in the U.S. We do have huge amounts of oil shale available. However, producing oil from shale is harder on the environment in almost every way than conventional oil drilling. One specific drawback is the extraction process’s demand for water–a scarce resource in most places that’s already the subject of numerous legal battles, and which is likely to become even more of an issue in the future.

Another possible alternative would be to focus our investment on resources that won’t make these kinds of demand on our land, and that won’t run out until the sun turns cold a few billion years from now.  We could choose to :

• Build our human capital
• Reduce our “environmental load”. This is more than just acknowledging our responsibility of stewardship; it’s reducing the risk of radical dislocations for ourselves and our descendants. (Limited fresh water in the U.S. is already an issue; problems in access to fresh water and food worldwide contribute to global instability.)
• Reduce our dependence on foreign oil, both in the relatively near term and for the foreseeable future.

Wind power is one piece of the “home-grown and sustainable” energy puzzle, along with a number of other technologies. (For a review of stuff currently being explored, see Fred Krupp’s Earth 2.0). Other promising solar, even geothermal, possibilities exist, and show tremendous promise. And yet, funding for research in these areas is comparatively minuscule. Our power grid is nearly inadequate even for its current load, and we stand to gain hugely by building capacity to move power–but we hear nothing about it from those who claim the leadership of the country. And our leaders tell us that it is imperative that we open up new drilling–to reduce the cost of oil by less then two percent.

The love for oil, and the disdain for our energy future, seem to trump even “pork-barrel politics”. My state’s senators, Brownback and Roberts, recently voted against an extension of the production tax credit for wind energy, because–as Roberts replied in an e-mail when I challenged him–that credit would have come out of subsidies for “other parts of the energy industry”, specifically refineries. Even leaving aside the benefits of wind energy overall, “my” senators betrayed their constituents’ economic interests by voting against this measure. Kansas is one of a minority of states with huge potential for wind-energy development, and thus would derive comparative advantage from the expansion of the wind industry. Our senators chose to deny Kansans this advantage in favor of subsidies to oil processors, an area in which Kansas has little if any particular advantage. I’m having trouble making sense of this decision either from a “selfish state” perspective or from the perspective of our country’s long-term well-being.

We can produce clean energy, and we can do it cheaply. We can avoid subsidizing totalitarian regimes, and reduce our vulnerability to them. We can keep our dollars circulating in the country. We can solve our transmission problems.  And, our leaders lecture us on the desperate need to drill, to reduce gas prices by four cents per gallon.

I don’t have time to write more now, and I’m too incensed at the myopic foolishness currently on display to write as well as I might. Instead, I’ll link to a couple of pieces by such “green communists” as T. Boone Pickens (who sees his personal interests aligning with national and global interest in the Pickens Plan) and Andrew Grove ( former Chairman/CEO of Intel and author of Only the Paranoid Survive).

Conciseness: Not Always Good

A headline today read: “Time Warner Killed Jon Miller, Yahoo Board Deal”. Though it wasn’t hard to figure out the probable meaning, it looked for all the world as though it was an article about Time Warner’s involvement in a murder and in something pertaining to Yahoo!’s board. Of course, the article makes clear that Time Warner killed a deal in which Jon Miller was going to join the Yahoo! board.

Watch your phrasing.

Holcomb coal plants and their proponents

Originally posted 2008-05-02:

Wow. I’m shocked. I’m ecstatic. The Governor’s veto of the “Holcomb bill” stands! For those who don’t know, Sunflower Electric and many in the Kansas Legislature have spent much of the last months attempting to ram through one of many different versions of a bill intended to “put in his place” the Kansas Secretary of Health and Environment, and to enact a law specifically to allow Sunflower to build two large coal-fired generators. To read a blow-by-blow account of the sordid story, read a couple months of history in CEP’s blog. The drama isn’t over yet, but does seem to have taken a very positive turn!

On the issue itself, I laud the legislators who chose to “do the right thing” and vote either against one of the “Holcomb bills” or against the override of the Governor’s veto of said bills. Coal, with proper management of its emissions, will likely need to be a part of our energy mix in the near term, although energy policy must soon turn towards sustainable sources and efficient uses for our long-term well being. An excellent summary of the issues is available from CEP.

For what it’s worth, for some time I’ve taken the position that, though it seems as though the weight of credible scientific opinion is that we’re dealing with substantial anthropogenic global warming (AGW), I don’t know enough about the subject to make any bold comments. I’m still not a climate scientist, but after reading The Hot Topic I do feel comfortable saying that some of the most credible arguments against AGW have been considered, and have been adequately refuted–it’s a very readable, practical book that gives an excellent survey of the science, looks at some of the costs and benefits of adaptation and prevention (and of doing nothing), and dispels myths of both the “there’s no problem” and the “there’s no hope, the sky is falling” varieties. But, the take-home message is: we do need to act wisely for the future. The pigheaded insistence that these plants must be built, essentially as planned, no matter what, does not strike me as an especially well-considered approach to planning.

Finally, I’d sort of forgotten the kind of pressure that people voting against forcing the coal plants through might face. I’m guessing that some of those advocating for the plants do so because it seems like “the least of evils”, and though I disagree strongly with them on the wisdom of that move (and plan to use that as a negative criterion for political support), I can generally respect them nonetheless. On the other hand, Speaker of the House, Melvin Neufeld is leading the charge for the coal plants–read the linked case for a window into the methods he’s used in the past. To those standing up to the pressure…thank you!

More on sugar alternatives

Originally posted 2007-09-29:

In an earlier post, I provided links to some credible sources of information on the physiological effects of artificial sweeteners. I recently gleaned a couple more relevant links from a list to which I subscribe.

One: yet another meta-review that, based on numerous studies, found aspartame to be safe. Note that, apparently unlike some other cases, the study does follow best practices of disclosing funding.

Two: The FDA sent a warning letter to Celestial Seasonings about using the “unsafe food additive” stevia–a plant-based sweetener which many promote as a “safe” alternative to oh-so-toxic synthetic sweeteners. MSNBC talks about the letter:

It also said “literature reports have raised safety concerns,” including those “about control of blood sugar, and the effects on the reproductive, cardiovascular and renal systems.”

The original letter may be found here, and the resolution here–apparently, it’s fine to sell stuff with these safety concerns, as long as it’s labeled appropriately. Oh well…I suppose you can’t blame the company too much for supplying what the market demands.

Health Effects of Artificial Sweeteners

Originally posted 2007-09-02:

I’ve had a number of encounters over time with horror stories about the ill effects of aspartame, saccharin, sucralose, and other artificial sweeteners. I’ve done some searching for hard facts regarding such sweeteners, and came up with a few links that seem fairly helpful.

First, an excellent speech on “Poisons of the Mind”, a good “backgrounder” in evaluating claims such as those above.

First, here’s a review of reports that aspartame becomes toxic when stored at temperatures exceeding 85 degrees Fahrenheit (conclusion: the reports are false). The list of references at the bottom may be helpful.

Next, a couple of seemingly fairly authoritative publications: a position paper from the American Dietetic Association, and the “Sugar Substitutes and your Health” booklet from the American Council on Science and Health (click on “View PDF Version” below the image of the book to access the free online version). (Update 2008-09-19: Although it doesn’t necessarily invalidate the ACSH booklet, it seems that there may be reason to question their commitment to sound science; see the update at the end of this post.)

Next, the FDA’s evaluation of “the Ramazzini Study”, a study often held forth by anti-aspartame advocates as evidence of aspartame’s deleterious effects (for the “mental antidote” to citation of this study, see the papers listed above). Also, the European Food Safety Authority’s evaluation of same.

Finally, a guide to “deconstructing Web pages” to determine their credibility; this is probably unnecessary for most readers of this blog, but is interesting nonetheless in providing a bit of a “critical thinking” checklist for readers.

2008-09-19: Since posting this, I’ve come across a couple of links regarding the American Council on Science and Health (ACSH) that concern me. If the assertions in the links are true (note that I haven’t “fact-checked” them at this point), this would be reason to read the ACSH booklet very critically, and to check the cited studies to ensure that they are credible and support the conclusions being drawn. Also, of course, links to the critics shouldn’t be taken as implying that I fully endorse their agenda or credibility either. Mainly, since I quoted ACSH as a source and found somewhat-credible articles questioning ACSH’s credibility, I thought it would be fair to include links to the critiques for aid in a fair evaluation.

(I’m not unaware of the irony of, in a post encouraging critical thinking, referencing a questionable source as a supporting document. However, it does provide a great opportunity to develop critical-reading skills! Also, it seems that quite a bit of independent corroborating information exists. It’s true as well that in this case, as well as others, true information can be presented by people whose motives one has reason to question.)

The critical pieces are:
“Confronting Pseudoscience and Threats from a Corporate Front Group: The American Council on Science and Health”
“Corporate Front Groups and the Abuse of Science: The American Council on Science and Health (ACSH)”

Blogging and privacy

Originally posted 2007-08-11:

I’ve just been engaged in a bit of a “cleanup” operation of my online profile. There’s nothing really bad out there, but I have a fairly “searchable” name, and occasionally find myself in situations in which a fair amount of discretion is advisable.

I hope my friends, relatives, acquaintances, etc. read Blogging Basics 101: Privacy–and, please, don’t use my family name! In the meantime, I’ve found several ways to increase your online footprint:
* Leave comments in guestbooks (d’oh!) I have a few of these from my young-and-stupid days (that time which preceded the current iteration of said state). Fortunately, all are in very innocuous locations.
* Participate with organizations with misconfigured servers. I found that one (I thought closed) list server apparently at some point made its archives searchable by Google. Another rather frightening find was that the server which my school used for online classes last semester apparently had *all* of its internal contents available to the Internet at large without authentication, and indexed by Google. These contents included a few papers written for classes. I’ve alerted the school and received a response (some personal information of my contact is indexed as well, so he has some incentive to get it taken offline (or at least behind walls) and removed from Google’s index as well). However, when I checked today, the server’s still up. I don’t have anything extremely confidential on the server, but…yikes!
* Have relatives and friends who blog. The number of vectors for information leaks is amazing…but is made all the worse by having a searchable name. I’m trying to mitigate this by asking said relatives and friends at least to use a truncated version of the name, decreasing “searchability”.

Simply in self-defense, I’m thinking I should perhaps start building an online profile, to crowd out some of the less-controlled search hits on my name. In the meantime…back to the Google patrol…

More on Accelerated Mortgage Payments

Originally posted 2007-07-17:

I did just a little more digging on the uFirst Financial Money Merge Account (MMA) presentation that I saw last night. It seems as though my initial thinking was close, but with one major flaw: though a little benefit (in terms of mortgage payoff time, not necessarily net worth) might come from depositing your check directly in the HELOC, most of the accelerated payoff apparently comes in the old-fashioned way: brute-force paydown, with–literally–every spare cent not otherwise used going to the mortgage. As noted in my prior post on the matter, I don’t necessarily see this as a good thing–the opportunity cost can be quite high, and your net worth will most likely suffer for it (though admittedly, situations will vary).

While I can’t claim to have fully reviewed these sites, I think you’ll come away knowing a lot more about the issues involved in payoff-acceleration schemes.

First, a site that looks like a great resource–though they could probably have benefited from a little help from an editor. Integra Mortgages describes what they see as “financial voodoo”, and offer worksheets that they say will walk you through what’s really happening with an MMA. Since they specifically refer to a $3500 fee, I’m guessing that they have uFirst in mind.

For a wealth of information (along with a lot of noise), check out FatWallet’s forum discussion pertaining to these and a host of related subjects. For a starting point, check out drosengarden’s posts; from what I picked up, he’s a mortgage broker who almost got started selling the product–until he figured out the same thing as the site above, that the magic is basically in throwing all your discretionary income at the mortgage. Though you’d be crazy to do that, by doing so you could achieve the same results as uFirst’s program fairly simply without spending the $3500. I haven’t spent much time with FatWallet, but it looks as though they aren’t lacking for smart “financial optimizers” in their online community.

Jack Guttentag, “The Mortgage Professor”, offered faint praise for a similar scheme:

Well, it is neither illegal nor absurdly illogical, which is more than can be said for most of the quick-repayment schemes I come across.

Finally, there’re some semi-favorable comments about similar schemes elsewhere in FatWallet’s forums. These’re from early 2006, when rates were quite low; apparently, the chance to arbitrage rates was at least somewhat attractive at that point.

Anyway…as one FatWallet poster said, if you’re selling a rubber chicken for $10K and it changes people’s behavior for the better, saving them $10,001, more power to you. However, I don’t expect to sign up in the near future to pay $3500 for software telling me how to follow a simple, and IMO foolish, system.

Update:Reading on through the FatWallet thread, I came across a linked BankRate article describing a couple of similar programs with “annual fees of $30 to $60″. If you really want to go this route, it’s worth checking out the article. (In case it disappears, it references the “Macquarie ‘Asset Manager loan” and the “CMG ‘Home Ownership Accelarator’ loan”.)

Update 2 – more links:
Jack Guttentag addresses the uFirst Financial plan directly.

Tony Rose (and no, I have no idea who he is) runs the numbers.