APR is not equal to APY

Forever, I have been told that APR is the same as APY, the only difference being that APR is the rate you pay whereas APY is the rate you receive. That is wrong. Here is why:

Let's say you have a mortgage with a 5.00% APR. What that means is that the lender will divide 5% by 12 (or a very similar calculation) to get the equivalent monthly rate of interest they will charge on your mortgage. In other words, on a 5% APR loan, if you make no payments for a year* and if all fees and other penalties are waived, a balance of $1,000 will turn into a balance of $1,051.16.

Month	Beginning	Ending
1	$1,000.00	$1,004.17
2	$1,004.17	$1,008.35
3	$1,008.35	$1,012.55
4	$1,012.55	$1,016.77
5	$1,016.77	$1,021.01
6	$1,021.01	$1,025.26
7	$1,025.26	$1,029.53
8	$1,029.53	$1,033.82
9	$1,033.82	$1,038.13
10	$1,038.13	$1,042.46
11	$1,042.46	$1,046.80
12	$1,046.80	$1,051.16

As you can see, a loan with a 5% APR, when compounded on a monthly basis, results in a balance that is 5.12% higher at the end of the year, so an equivalent annual simple interest for this loan would be 5.12%.

On the other hand, if you deposit $1,000 in your favorite financial institution at a 5.00% APY on January 1st, compounded daily, how much would you expect to get back on January 1st the next year? If you said anything more than $1,050, you would be wrong.

Whether compounded daily, monthly or quarterly, any APY rate is the exact equivalent simple interest percentage you would get on your deposited amount in one year.

* - this is only for the purpose of illustration - in real life, you definitely don't want to do this!!

What interest did you pay this month on your mortgage?

Here is an easy way to figure out how much money you paid on your mortgage this month. First thing you need to know is that mortgage interest is always paid in arrears, i.e., on January 1st, the mortgage payment that you make will contain the interest for the month of December.

So, the first step is to note the balance on your principal as of December, say it is $100,000.

Next, you need to find out your monthly rate of interest, and to do so divide the annual interest rate by 12. Say your interest rate is 3.6% (I am using a number that is easily divisible by 12, but rates are in that range right now!), then you would get 0.3%.

The interest is then the product of the balance and the interest rate, which in this case is $100,000*0.3/100 = $300.00

The remaining portion of your monthly mortgage payment pays down the principal, and also the escrows.

What is his Golden Parachute Worth?

JPMorgan Chase is set to purchase Bear Sterns for 2 bucks a pop. The soon to be ex-CEO of Bear has this to say.

Bear Stearns shares closed Friday at $30 a share. At their peak, the shares
traded at $159.36. "The past week has been an incredibly difficult time for
Bear Stearns," said Bear Stearns Chief Executive Alan Schwartz in a statement.
"This represents the best outcome for all of our constituencies based upon the
current circumstances."

I seriously wonder how this "best outcome" impacts his personal financial situation, i.e., how golden is his parahute?!!

Real-Estate Crash Traps Owners ...

Truths the market teaches us:

Why it is never good to take on more loans just because they are available ...

Although speculators drove prices upward in many instances, conventional homeowners took advantage of the rise in property values by taking on home-equity loans that increased their debt -- often to amounts greater than they had paid for their houses.Now, with prices falling, those who want or need to move often face a dilemma: Should they lower their price below what they owe on their property and pay the mortgage balance from their savings? Or should they stay put, paying down mortgages and waiting for the market to rebound?

But sometimes, circumstances beyond your control will cause you grief ...

Mike Larson, a real-estate analyst with Weiss Research in Jupiter, said those who must move might no longer have a choice."If you bought in many Florida markets in 2004, 2005 or 2006, it is very likely that you just won't get your money back," Larson said. "You see this same thing when people have to sell stock for less than they paid for it, but housing is different."People have a lot tied up in their houses, and they don't like to think about losing money on them."Larson said sellers need to face the reality of the current market and think creatively.

On Credit Cards

If you pay off your balance in full every billing cycle, the Oracle of Orlando recommends these two reward cards.

- PenFed Visa (please note that you first need to be a member of Pentagon Federal Credit Union)
- Fidelity Visa/AMEX/Mastercard (whichever is the flavor of the day)