Category Understanding the Mathematics of Personal Finance

BALLOON LOANS

A balloon loan is one in which the term of the loan (i. e., the number of payments) is just a number on which the monthly payments is calculated. After a relatively small number of years (5 or 10), the loan suddenly “balloons,” and the entire balance is then due in one lump payment. Assuming that you don ’ t happen to have this money in the bank, you can suddenly find yourself scrambling for a new loan with which to pay off the old loan. If this happens to you, hope that interest rates have gone down, or at least haven’t gone up very much since you took the loan.

tn my spreadsheet, on either tab, the balloon payment at a given payment number is just the balance plus the monthly payment (remember that the balance entry is the outstanding loan balance after the monthly payment has be...

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TERM INSURANCE

The simplest kind of life insurance policy you can buy is term insurance. As the name implies, a term insurance policy insures you for a specific term. You pay a premium up front for the policy. If you don’t die during the term, you and the insur­ance company no longer have any contractual relationship. Whatever happens, the insurance company keeps the premium. Actually, term insurance is the only kind of life insurance there is. All the other life insurance products that you can buy are built on term insurance policies, sometimes combined with savings/investment accounts.

Term insurance policies themselves can get very complicated. They might be written for many years, and payments made might be spread out over these years rather than up front...

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GRACE PERIOD

The grace period is the period of time during which you are offered 0% interest on your purchases if you pay off your total balance in full. Let me break out a few of these points carefully. For the bank cards that I’m familiar with, there is no grace period on cash advances. You start accumulating interest when you get the cash and the accounting is done as shown in Tables 6.2-6.4 . To get a grace period on your purchases, you must pay off the total new balance, not just your purchase balance, on your statement within the grace period.

How long is the grace period? Typically, almost a month. However, if you’re getting your statement in the mail (as opposed to online), then 5-10 days can go by after the closing date before you see the statement...

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Reverse Mortgages and Viatical Settlements

12.1 REVERSE MORTGAGES

A reverse mortgage is a variation on a home equity loan with some insurance and annuity concepts scrambled into the mix. Before going further, I should mention that government regulations limit the availability of reverse mortgages to people age 62 or over.1

Assume that you, or the youngest of you and your partner, is at least 62 years old. You own your home (or the two of you own it jointly). Your personal credit rating is unimportant except for a few specific items such as an outstanding tax bill.

A reverse mortgage will give you a lump sum loan today (or another option that I’ll present later on). You don’t make any payments on this loan. You continue living in your home until the second of you dies or you decide to sell the home...

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CALCULATING THE PAYMENT AMOUNT

Spreadsheets and online calculators handle this calculation very nicely. This section, deriving the formula, can be skipped if you wish.

If R is the annual interest rate and y is the number of payments per year, which we’re assuming is the same as the number of compounding intervals per year, then

Подпись: R У is the interest per payment period. As a notational convenience, let

R

I — 1 + .

y

The balance at the time of taking the loan, that is, after 0 payment periods, is just the principal. If we let Bn be the balance after the nth payment, then if P is the principal:

Bo — P.

The balance after the first payment period is just the principal plus the interest accrued during this period minus the payment (S):

Bi — P + PR- S — P|1 + R |-S — Pi – S.

У V y)

This relationship is recursive...

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A FEW LAST WORDS

When interest rates go down, it’s time to investigate opportunities for refinancing your home. This means that you look for a new mortgage loan that will replace your old mortgage loan at a lower interest rate. In many cases, the up-front costs of the new loan are very low (sometimes even 0). As always, folding the up-front costs into the new loan gives you an effective interest rate and a resulting monthly payment number.

There are some “gotchas” in refinancing a home that you have to keep in mind. Let’s say that you are 15 years into a 30-year mortgage and the opportunity comes along to refinance at a lower rate...

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