Figuring Out Interest on a Mortgage Payment
Q: How do I figure out what portion of my monthly mortgage payment is interest and what goes toward paying off the principal? Is there a mathematical formula I can use? We have a $200,000 mortgage at 9 3/8% interest for 30 years and are paying $1,666 per month to the bank. --S. A.
A: There is a mathematical formula you can use to make the calculations, but you practically have to be a rocket scientist to explain it, let alone use it. It’s far easier to ask your lender to provide a breakdown as well as a full 30-year amortization schedule, a document that details the allocation of your mortgage payment between interest and principal for each month of your 30-year loan.
That said, borrowers may have a number of reasons for wanting an independent source of information. Lenders make mistakes, and even if no mistakes are made or suspected, borrowers should have a full and clear understanding of the underpinnings of their mortgage payments--probably their largest monthly expense. This is especially true with adjustable-rate mortgages.
Holders of adjustable-rate mortgages should know the index their lender uses to adjust their rate. In California, many lenders use the “11th District Cost of Funds,” which, despite its esoteric title, is simply the interest rate banks in the Western United States must pay in a given month to attract deposits. Typically, loans tied to the 11th District cost of funds run about 2 percentage points above that index, a margin that becomes the lenders’ operating profit.
Adjustable-rate mortgage holders should know the spread between their mortgage rate and the index to which their loan is pegged, how often the loan can be adjusted, the maximum increase allowed each year and the maximum increase allowed over the life of the loan. All this is spelled out in mortgage documents.
Each time your loan is adjusted, you should be notified and told your new interest rate as well as the rate of the index to which your loan is tied. Major cost-of-money indexes are regularly published in this and other newspapers. Check to be sure that your lender has not made a mistake.
Fixed-rate mortgage holders should be able to get an amortization schedule for all 360 months their loan is set to run. Adjustable-rate holders can obtain an amortization schedule for only the period their latest interest rate is scheduled to run.
If your lender won’t provide you with one, or you suspect that your adjustable-rate loan is being improperly adjusted, you have several alternatives. Books of amortization schedules are available, as are computer programs that can perform the calculations. Some special calculators can handle the task as well. Special mortgage services can analyze your adjustable-rate loan, prepare amortization schedules--all for a fee, of course. Mortgage Surveillance Reports in Irvine offers a mortgage audit for $40. The service promises a complete evaluation of an adjustable-rate mortgage from its inception to determine if rates have been properly calculated and the loan properly amortized. The service also offers amortization schedules. For more information, call (714) 455-1775.
According to Robert Drapper, owner of Mortgage Surveillance Reports, your first $1,666 monthly payment was split as follows: $1,562.50 for interest and $103.50 for retiring your $200,000 loan. The following month, slightly less was allocated to interest because your loan had been reduced by $103.50, and slightly more went toward reducing the principal. For the first year of your loan, you paid $18,695.22 in interest and reduced your loan balance by $1,296.78.
How to Give Away Your Money Tax Free
Q: I am still confused about giving away my money in the form of tax-free gifts. If my wife and I together give our daughter $20,000, can we do the same for another relative in the same year? Is the gift given subject to any tax on us? Must the gift be reported by the recipient to the Internal Revenue Service? --W.M.
A: The law permits any individ ual to give any number of other individuals $10,000 per year. Neither the donor nor the recipient is required to report the gift. And the money is tax free to the recipient. (Remember, Uncle Sam has already gotten his share; the money was not tax free to the donor, and the donor gets no tax benefit from making the gift.)
Declaring a Loss on an IRA Investment
Q: I own 400 shares of stock in my individual retirement account. I paid $12 per share, and they are now worth about $1.50 each. May I transfer the shares to my regular brokerage account, sell them and declare a loss on my taxes? -- G. J. M.
A: Your plan won’t work. For starters, any distribution from an IRA is taxable. You could also be subject to a 10% penalty if you withdraw IRA funds before turning age 59 1/2.
Basically, taxpayers have no way of writing off the losses in their IRAs. And if you think about it, it makes sense. Remember that most IRA accounts contain money contributed on a pretax basis. So why should Uncle Sam give tax writeoffs for losses on investments made with money that hasn’t yet been taxed? This is one more reason that IRAs should be placed in the most safe investments.
