## The Principal is always Your Pal

Last week I wrote a very flawed post about What would Happen if Interest Rates doubled. Luckily my sharp-eyed commenters called me on it.

First point, like in school the PrinciPAL in your Mortgage is your Pal, not principle, as I originally wrote it. Someone commented how would anyone take me seriously if I was unable to discern the difference, I pointed out as the “Clown Prince of Personal Finance” respect isn’t really that high on my list.

The other major blunder I made was in my spreadsheet. Let’s have a look at my first assertion from my mortgage table. What’s wrong here:

 Payment Number Principal Interest Payment Principal Payment 1 \$250,000.00 -\$833.33 -\$486.26 2 \$249,513.74 -\$831.71 -\$485.31 3 \$249,028.43 -\$830.09 -\$484.37

Take a look at the PrinciPAL payment column, somehow my weird calculations have the amount you pay down on the principal each payment, decreasing, which is just SO wrong (even wronger than saying Principle of your Mortgage (in my subtle opinion)). What was wrong with me? I don’t usually screw up that many things in one article (that often).

The mistake I made was relying on the Excel PPMT() function to figure this out, instead of doing a simple calculated version on the basis of the Interest payment from IPMT()

Principal Payment = Monthly Payment – Interest Portion
Principal Payment  = \$ 1319.59 –  \$ 831.71 = \$487.88  (for Month 2) (it got Month 1 right)

So really what this should have looked like was:

 Payment Number Principal Interest Payment Principal Payment 1 \$250,000.00 -\$833.33 -\$486.26 2 \$249,513.74 -\$831.71 -\$487.88 3 \$249,025.86 -\$830.09 -\$489.51

Thus the table for the end of the 5 year term would look like:

 56 \$220,700.69 -\$735.67 -\$583.92 57 \$220,116.76 -\$733.72 -\$585.87 58 \$219,530.89 -\$731.77 -\$587.82 59 \$218,943.07 -\$729.81 -\$589.78 60 \$218,353.29 -\$727.84 -\$591.75

More importantly the overpayment option now looks much better too:

 Payment Number Principal Interest Payment Principal Payment Overpayment 37 \$231,433.88 -\$771.45 -\$548.15 -\$610.00 38 \$230,275.73 -\$767.59 -\$552.01 -\$610.00 39 \$229,113.73 -\$763.71 -\$555.88 -\$610.00 40 \$227,947.85 -\$759.83 -\$559.77 -\$610.00 41 \$226,778.08 -\$755.93 -\$563.67 -\$610.00 42 \$225,604.42 -\$752.01 -\$567.58 -\$610.00 43 \$224,426.84 -\$748.09 -\$571.50 -\$610.00 44 \$223,245.34 -\$744.15 -\$575.44 -\$610.00 45 \$222,059.90 -\$740.20 -\$579.39 -\$610.00 46 \$220,870.50 -\$736.24 -\$583.36 -\$610.00 47 \$219,677.15 -\$732.26 -\$587.33 -\$610.00 48 \$218,479.81 -\$728.27 -\$591.33 -\$610.00 49 \$217,278.49 -\$724.26 -\$595.33 -\$610.00 50 \$216,073.16 -\$720.24 -\$599.35 -\$610.00 51 \$214,863.81 -\$716.21 -\$603.38 -\$610.00 52 \$213,650.43 -\$712.17 -\$607.42 -\$610.00 53 \$212,433.00 -\$708.11 -\$611.48 -\$610.00 54 \$211,211.52 -\$704.04 -\$615.55 -\$610.00 55 \$209,985.97 -\$699.95 -\$619.64 -\$610.00 56 \$208,756.33 -\$695.85 -\$623.74 -\$610.00 57 \$207,522.59 -\$691.74 -\$627.85 -\$610.00 58 \$206,284.74 -\$687.62 -\$631.98 -\$610.00 59 \$205,042.77 -\$683.48 -\$636.12 -\$610.00 60 \$203,796.65 -\$679.32 -\$640.27 -\$610.00

Remember, it’s OK to point out my mistakes, but don’t be a comment troll about it either. Thanks to Michael James for pointing out the folly of my arithmetic.

{ 2 comments… add one }
• bigcajunman January 15, 2014, 3:04 PM

Here is another comment that I did on the site, but this is odd.

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• bigcajunman January 15, 2014, 1:49 PM

Here is a comment from Michael James, which for some reason couldn’t get posted:

Your mortgage calculations appear to be correct, but you’ve actually used in interest rate of 4.033% instead of 4%. You just used 4%/12 as the monthly rate as though mortgage rates compound monthly, but most Canadian mortgages compound every half-year. So, starting with the yearly rate r, you get the half-year rate as r/2. Then the monthly rate is (1+r/2)^(1/6)-1. Clear as mud, right?

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