Right after the mortgage meltdown and the financial crisis, many people began shunning adjustable rate mortgages. Many of these mortgage products featured “teaser rates” that re-set after a few months, or that had other characteristics of subprime loans. However, as the economy recovers somewhat, and as borrowers look for good deals, ARMs are making something of a comeback.

The New York Times reports that ARMs that re-set five to seven years down the road, with a cap after the fixed rate period, are on the rise. One of the reasons that borrowers are looking into ARMs is due to their usually lower interest rates. The initial rate on an ARM is often lower than what can be had on a fixed rate mortgage, and it can mean some savings on interest. However, it is important to make sure that you can truly afford your mortgage — no matter what type you get.

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Salle Mae Bank, which recently began offering their Sallie Mae online savings account, recently announced they were increasing their interest rate from 1.25% APY to 1.40% APY, putting it near the top of the interest rate list for high interest savings accounts. With no monthly fees, no minimum balance, daily compounding, and a competitive rate, Sallie Mae Bank has made a big splash in the online bank space despite being around for such a short period of time.

Their CD rates are competitive too, if my memory services me right (as of May 11, 2010):

• 12-Month: 1.55% APY
• 36-Month: 2.40% APY
• 60-Month: 3.00% APY

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It doesn’t take a genius to know that compound interest is a pretty remarkable thing. When your interest earns interest… and then earns some more, it can make for some large numbers over a long period of time. That part isn’t so difficult to understand even though plenty of people have written about it.

So why did I make a video about the “true power” of compound interest? Watch.

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Josh Chan, a student at Stanford University, sent me a video he submitted to Stanford FCU’s video scholarship contest. It’s a superbly done stop-motion video that explains how saving a penny a day can yield you hundreds of dollars after only a short while. I was impressed by the stop motion (I imagine this took a lot of work) and the fact that Josh is financially savvy enough to recognize the value of compounding interest while in college. I wish I was that financially cognizant at his age!

Check out the video:

Contest details

The winner of the contest will be based on the number of votes he or she gets so if you have a moment, register and vote for his video. You can vote once a day until the end of September. If you’re as impressed as I am by the video, I know you’ll join me in voting for him.

What did you think?

Near the end of May, the FDIC Board of Directors approved a rule that capped the interest rate “less than well capitalized institutions” could offer. For quite some time they listed weekly national rates. It was only until last month did they institute rate caps, which are defined as 75 basis points above the national rate. The national rate is just the simple average of rates paid by all insured depository institutions and branches for which data are available.” If a region has a much higher prevailing rate, then banks in that region will be allowed to use local averages plus 75 basis points as the rate cap. This rule wouldn’t go into effect until January 1, 2010.

The idea is that a bank that isn’t well capitalized will be in dire need of some liquidity and boosting your rates is a great way to increase deposits but put you in a difficult spot down the road. When Washington Mutual offered 5% APY certificates of deposit, everyone knew that it was a play for deposits. This rule would make that impossible.

What do you think? Is this a good idea or a bad idea? Do you think that the government is overstepping?

Incidentally, the current rate cap, effective 6/8/2009, on a savings account is 0.96% and a 12 month CD is 1.98% APY. Those are some pretty sad rates.

Debt.

Some see it as a tool to be used to help them improve their financial situation. Some see it as a temptation to get more than you should be allowed to. And some see it was an insidious monster lurking around the corner, waiting for you to slip and make a mistake. Some see it as something the never want to touch.

Today we’re not going to talk about any of that stuff. Today I want to share with you some “fun facts” about debt that you might find useful at your next trivia night!

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I received an email earlier this week from Tomas, asking what daily compounding meant, and I thought it would best be answered with a video post. The video discusses, in very basic terms, what compounding is as well as two common acronyms you see when talking interest rates: APR and APY.

I created an APR to APY (and back) Calculator a while back and it makes it easy to compute the two.

Please let me know what you think!

A blended interest rate is an interest rate over an amount where parts of that amount are charged, or earning, different interest rates. Blended interest rates are useful in making important comparisons between different offerings such as mortgages or high yield savings accounts.

With mortgages, the math is simple. You’re calculating the rate based on two separate sums. With a bank, it’s slightly more complicated because you are often accruing interest at one rate for part of the year and then accruing it at another rate for the rest of the year. We’ll explain both.

Mortgages

In the home mortgage example, let’s say you have the choice of getting one loan at $100,000 for 6.00% APY or two loans – one at $80,000 for 5.75% APY and one at $20,000 for 6.50% APY. Which is better? In order to make the comparison, you need to calculate the blended interest rate. Fortunately, it’s an easy calculation.

Take each amount and multiply it by the interest rate. Then add all those numbers together and divide by the total amount. In the above example, that would be:

($80,000 x 0.0575 + $20,000 x 0.065) / $100,000 = 0.0590

The blended rate is 5.9%. It is better to get the two loans.

Mortgages Blended Rate Calculator:
Of course I couldn’t leave you hanging without an easy way to calculate this (no commas or dollar signs please):

NOTE: You can also use the above calculator to figure out your blended rate of return on multiple investments with different interest rates, it’s the same equation whether you are earning or paying interest.

Bank Interest

Now we get to the example of one sum accruing interest at one rate for part of the year and at another rate for the rest of the year. This is common if your bank offers a promotional rate for new account holders. Everbank is good example – they offer 4.01% APY for the first three months, then 3.21% APY thereafter.

The first step is determining the APR of both rates. Assuming a monthly period, the APR – APY Calculator tells us that the rates are 3.93% APR and 3.16% APR. Dividing each by twelve, we learn that for the first three months your balance will increase by 0.3792% and then increase by 0.2942% thereafter. The blended rate is:

= ( (1+r1/tp)^r1p x (1+r2/tp)^r2p ) – 1
= ( (1.003275)^3 x (1.002633)^9 ) – 1
= ( 1.00985721200 x 1.0239481162 ) – 1
= ( 1.0340414 ) – 1
= 3.40% APY

Legend:

• tp is the total number of periods, in our case it was 12,
• r1 is the first period’s interest rate (APR),
• r1p is the number of periods you get that promotional interest rate,
• r2 is the second period’s interest rate (APR),
• r2p is the number of periods you get that second interest rate (we limit it to 12 months to calculate APY).

To makes things simple, here’s a quick and dirty blended interest rate calculator.