Saturday, December 6, 2008

Mortgage Arithmetic Behind Tribune Article

Some Tribune readers asked to see some arithmetic. I posted some mortgage arithmetic here in an Excel spreadsheet.

Although this example shows that you would actually have LESS money to spend if you found a job quickly, please note that this is not the entire point. The point is that a large fraction of the money you generate by working goes to the bank. That's why its like a tax: earn more = pay more to bank; earn less = pay less to bank. Yes, a person paying a 50% tax can spend more if he works more. But he has half the incentive to work than he would have if he paid a 0% tax.

In a normal situation, your decision to work has nothing to do with what you pay the bank. You either pay in full or give up your house, regardless of how much you work and earn. But 2008 is not a normal situation.

1 comment:

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