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First off, credit goes to dukee for doing the initial legwork on this somewhat unusual "increment" method of computing HEL terms at netbank (versus more common "invoice" method, distinction credited to ridin4free). He has been proven 100% correct.

As dukee first indicated in the main Netbank/First HEL thread at http://www.fatwallet.com/forums/forum.php?start=0&catid=18&threadid=53218 , netbank's HEL is computed as what they call a "Simple Interest Loan" using an "increment" billing method rather than a conventional HEL or mortgage loan, which uses an invoice method using compounding interest. That means that a conventional amortization table that is used to calculate other loans is inapplicable in this case. Instead, when you make a payment, the payment is applied on the day check reaches them. Simple interest accrued since the last payment was received is then deducted, and any remainder is applied to principal. So the formula is:

(Principal balance) x (loan rate)/365 x (days from last payment) = portion of current payment devoted to interest

Here is the exact text taken from the Netbank promissory note:

I will pay this loan in 180 payments of $795.44 each. My first payment is due Dec 2 2001, and all subsequent payments are due on the same day of each month after that. My final payment will be due Nov 2 2016 and will be for all principal, all accrued interest and all other unpaid costs and charges not yet paid. Payments include principal and interest. Unless otherwise agreed to or required by applicable law, payments will be applied first to accrued unpaid interest, then to late charges, then to fees and then to principal. Interest on this note is computed on a 365/365 simple interest basis: that is, by applying the ratio of the annual interest rate over the number of days in a year (266 during leap years), multiplied by the outstanding principle balance, multipled by the actual number of days the principal balance is outstanding.

(Disclaimer: this is followed by a "prepayment" section, which says that if I elect to prepay, there (1) is no penalty to prepay, and (2) no obligation on netbank's part to relieve me of monthly payments unless I get it from them in writing. That does suggest that if my early payments would have been coded as prepayments, rather than regular payments, I would have needed written approval to make this all work. Happily, this did not prove to be the case with Netbank.)

This effectively means that ANY pre or over-payment you make to netbank is a de facto prepayment of principle, EVEN THOUGH every monthly payment still pushes back the time of your next payment due by an entire month. This makes exact balance figures difficult to calculate at any given time, but that trivial disadvantage is offset by a major advantage: you can strategically pay off the loan to maximize mortgage interest tax deductions and interest rate fluctuations in the market without giving ANY tax free loan to Netbank (as you would using these strategies with a conventional mortgage.) Let me use my situation as an example.

Generally, my wife and I (32 and 31, dual income, no kids) face a close call between choosing to itemize and choosing to take the standard deduction on our taxes. (Recall that mortgage interest, along with most other potential deductions including charitable deductions, are deductible ONLY if you itemize.) For reference, here are the standard deductions for 2001:

Single $4,550
Married filing jointly/Qualifying widow(er) $7,600
Married filing separately $3,800
Head of household $6,650

This year, it will make sense to itemize, thanks to significant charitable deductions and $7K+ in mortgage interest (but not much else.) However, thanks to netbank, our mortgage interest next year will drop to around $5400 or so, keeping us well below the standard deduction cutoff line (which will be adjusted upward for inflation next year anyway.) So it will only be thousands in charitable contributions that will allow us to break even.

So, here's the strategy. We're going to pay ALL the rest of our 2002 netbank payments (Feb-Dec)--about $8800 at the end of Dec 2001. (Note that part of the Feb payment will be interest, based on the above forumula, while ALL of EVERY OTHER payment will go straight to principle, cutting our balance and interest accruing, and thereby reducing the life of the loan.) Then we pay NOTHING at all on our netbank loan in 2002. We also wait until Jan 1 2003 to make our Christmas 2002 charitable contributions. As a result, we have NO deductable interest or charitable contributions in 2002, and we take the standardized deduction.

THEN, in 2003 we resume regular netbank payments. Because we will have accumulated $4725 in 2002 back interest, essentially ALL of the 2003 payments we make--$9600 or so--will go to interest, and be fully deductable. When we add 2002 (done in Jan 2003) AND 2003 (done in Dec 2003) charitable contributions, we will have itemizable deductions that dwarf the standard deduction, and come out way ahead by itemizing. We can then repeat the cycle, taking the standard deduction in 2004, and the big writeoff in 2005. This should save us $1-3 thousand in taxes in every odd-numbered year for the next several years.

BUT WAIT, THERE'S MORE:

By making the big payoff now, we (and you!) can take advantage of VERY low interest rates. To wit, the prime is now 4.75%, and many credit cards are offering 0% for nine months or more, 1.9% for a year, etc. And, by drawing on credit lines like this (or simply investing your "extra" from netbank or savings), you get an effective 5.25% sure thing on your "investment" in prepaying your netbank HEL by say 11 payments. So, assuming you have this $ available at these low rates, YOU MAKE A PROFIT doing this even aside from the tax benefits. And if you would not have itemized your deductions for 2002 anyway, all those "profits" would effectively be tax free <img src="i/expressions/face-icon-small-smile.gif"border=0>

ANOTHER BONUS

By paying off a chunk now per the above strategy, in a couple of months your credit reports will show you owe that much less on your house (e.g., $89K versus $100K.) That means that if you want to open a second HEL or HELOC with someone else, you'll be more capable of doing so, because the Loan-to-Value on your house will show up as less. So, you can do this with a 6 month credit card balance transfer offer, then wait 3 months, get a DeepGreen Bank HELOC for a HIGHER amount than you could otherwise, and then use the extra part of that HELOC to pay off the balance transfer after the promo period is over (or as a source of reserve funds should you need it.)

NOTE THAT MONLTY PAYMENT AMOUNT NEVER CHANGES.

No matter what, your due monthly payment is fixed for the life of the loan. Paying extra just means you shave months off the term of the loan. This is like most conventional fixed rate mortgages, but unlike conventional adjustable rate mortgages, where the monthly payment is generally recomputed every year.

SOME OTHER IMPLICATIONS:

-Don't be afraid to send in your payment coupons early. It will only help you by acting as an immediate, hassle-free prepayment to principle.

-In tax years where you intend to itemize your deductions (which allows you to deduct mortgage interest), make your last payment for that year as close to Dec 31 as possible without being later than that. This way, you'll have the maximum possible interest deducted in that calandar year.

-Never mark a netbank payment as "additional payment to principle." Just pay future month's payment coupons early. Why do this when paying off extra months early has the same effect, AND effectively lets you skip payments later with no penalty?

Is all this clear?
Do any of you have other related ideas?
What did I miss?

UPDATE 5/8/02: I've posted a new webpage herethat should clarify my current thinking on this. I will be discussing its implications for all increment, simple interest loans in its own thread, but thought it might be helpful to add it here.

UPDATE 01/07/03: It officially worked! As of this morning, netbank has recorded my 12 payments for 2003 AND credited all the interest accrued in 2002 to 2003, as hoped. The web page has been updated accordingly.

Dave,
Is there another way to take advantage of this interest computation method for those that don't have the expendable cash to pay a whole year?

Would it be more beneficial to pay early (for the month) and add principal or simply pay early and save/invest that additional money until we can pay a whole year in December 2003 or 2004 to use your strategy? It probably depends on each person's particulars regarding loan amount, income, and assets but this thread is a good place to get all savings strategies regarding payments and interest from the Netbank loan together in one place. Plus the original thread was getting pretty hard to wade through.

Thanks,
IClight

IClight,


<< Is there another way to take advantage of this interest computation method for those that don't have the expendable cash to pay a whole year? >>


I think so. If (1) you will be taking the standard deduction, and (2) you don't need the cash for a better use at the moment, then I think this interest computation is a good argument for prepaying/paying early what you can afford.

If you don't itemize, then prepay is equivalent to a 5.25% TAX FREE return (taxable if you itemize), which is WAY better than ANY savings or checking account, and will be for the next several month minimum. Plus, you give yourself flexibilty--get laid off, have a tough month, etc? Then just don't make a mortgage payment--if you've prepaid for that month anyway, then no penalty.


<< It probably depends on each person's particulars regarding loan amount, income, and assets >>


Exactly. But I would be happy to try to help, and I agree that this is probably an appropriate place to try to do that.

DaveHanson,

Did you confirm that you don't have to make any payments in 2002 if they are paid in 2001? No late fees or credit implications?

cache, yes. No problems. The reason is simple--you already paid your 2001 payments.

DH, just trying to make sure I'm following this...

You can pre-pay an entire year's worth of payments with either NetBank's HELO or a standard mortgage. The difference is that with NetBank, your pre-payment is effectively treated as a pre-payment of principal, but you still get the benefit of not needing to make the next payment until N = [(pre-payment amount)/(monthly payment amount)] months. Interest on the remaining principal still accrues during those N months, but it will be less than the interest one would've had to pay out during those N months had they pre-paid a conventional mortage since the principal was whacked down at the beginning rather than being whittled away over N months.

So it sounds like this pre-paying and itemizing deductions every other year tactic could be applied to any mortgage, but it's more beneficial in the NetBank case due to the instant crediting of the pre-payments to your principal. Is that about right?

I guess the only other thing that comes to mind is to consider whether or not the behemoth deduction every other year drops you into a lower tax bracket. That may put a damper on how much of a benefit this strategy is to you. In DH's case, being DINK's, this probably isn't an issue.

Great find! Kudos to those of you who can afford to benefit from this.

Sound great!!!

So if I prepay my whole year worth of payments as 775/month * 12 month = 9300. Then I don't have to pay anything in 2002 and my payment goes directly to my principal right?

How do I do just that? Send a check for the whole amount or rip off those payment coupons for 2002 and send them separately with a check for each coupon????

Very well said, ROFL--that's the idea exactly. <img src="i/expressions/face-icon-small-smile.gif"border=0> I think your paraphrase may be clearer than my statement. <img src="i/expressions/face-icon-small-smile.gif"border=0>

And you are right that this could be done with a conventional mortgage. However, it wouldn't be a good deal for you, because you'd be paying for interest on 2002's payments that you'd never "use."

This wouldn't amount to much if it meant, say, paying Jan 2002's payment early. (Indeed, many financial web sites will offer just that tip around this time of hte year to save money on your taxes.) You're still giving your mortgage company an "interest free loan" on the early payment, but it's trivial, since we're talking one payment for a couple of days. HOWEVER, if you prepaid the whole year, it wouldn't be trivial at all--indeed, it should more than offset the extra tax deduction. And that's assuming the mortgage company credited it correctly. With my old mortgage company, getting ANYTHING credited correctly was a Herculean task.

With netbank, there's no special instructions needed. Just send in all 11-12 payment coupons with a check attached, stating "for Jan-Dec 2001 monthly payments."


<< I guess the only other thing that comes to mind is to consider whether or not the behemoth deduction every other year drops you into a lower tax bracket. That may put a damper on how much of a benefit this strategy is to you. >>


I could imagine this being a consideration, although it should be a fairly minor one. Keep in mind that at least in the scenario outlined, the alternative is paying higher taxes EVERY year.

Thanks for the post!

Edit: asianguy30,

Yes, exactly. If you were really concerned, you might paper clip a seperate check to each payment coupon, though I don't think this is necessary. I'll just send a note confirming what I'm doing along with one check for the whole amount and the whole year's payment coupons.

DaveHanson,

I'm trying to follow your logic here. It sounds like you are taking the standard deduction one year, then itemizing the next year. Are you doing the same thing with charitable contributions that you are with mortgage expense? If I understand, you are deducting two years of interest and contributions in one year, then claiming no interest or contributions the next. Is this right?

In my case, I usually have ~$10k in charitable contributions. I made these weekly(church). Can I do the same thing you are doing?

Thanks,
RandyH

DaveHanson,

If you are having automatic withdrawals for your payments, you can't do this, right?

RandyH,


<< It sounds like you are taking the standard deduction one year, then itemizing the next year. >>


Exactly. Itemize 2001, standard 2002, itemize 2003.


<< Are you doing the same thing with charitable contributions that you are with mortgage expense? If I understand, you are deducting two years of interest and contributions in one year, then claiming no interest or contributions the next. Is this right? >>


Yes, and yes. <img src="i/expressions/face-icon-small-smile.gif"border=0>


<< In my case, I usually have ~$10k in charitable contributions. I made these weekly(church). Can I do the same thing you are doing? >>


Sure thing RandyH <img src="i/expressions/face-icon-small-smile.gif"border=0> You'll just want to use that extra netbank HEL to make your contributions for 2002 to your church before 2001 ends. Tell your pastor/minister that you want to make your contributions in a lump sum, early, before the year starts. (S/he will likely appreicate it, because contributions are down this year due to economy and terrorist attacks, and many charities are strapped.)

The catch: Make sure that your contributions don't go over the deductible percent of your AGI (I think it's 30%? I'll check that), so that you can deduct all of it. Also, depending on your income, this MIGHT plop you into a lower bracket, which might water down the deal a bit. But it still sounds like it might work well for you.

BTW, it's off topic, but props to you for giving generously to your church! Charitable dontations to those who make good use of the funds are just about the hottest deal of all, IMHO. <img src="i/expressions/face-icon-small-smile.gif"border=0>

Edit: RE auto payments: simply get off auto payments (should be easy), and you can do this.

I think this will work if you can itemize one year and take standard deduction the next year. In my case, I have to itemized at least for the next 3 years to write off those investments loss when the stock market crashed. <img src="i/expressions/face-icon-small-smile.gif"border=0> <img src="i/expressions/face-icon-small-smile.gif"border=0>
Now does this still make sense if I am force to itemized all the time.

DaveHanson,

Thanks for all the info, I think I may try it on the mortgage interest, but no way I can come up with all the charitable contribution at one time.

So, the deal might not be quite as sweet, but there would be some savings just doing the mortgage interest.

Thanks,
RandyH

asianguy30, are you talking about stocks you sold for a loss?

I'm sure you do NOT need to itemize to deduct these--I've not had to in the past. Of course you can only deduct $3,000 each year that isn't offset by other gains. A great site for info on all this is http://www.fairmark.com .

All: Note that while this makes sense for 2001-2, it may not make sense to do it again for 2003-4, since interest rates will likely be substantially higher by then. And if the are much higher, you MIGHT do better investing that money rather than getting 5.25% from paying debt off, even with the tax benefit. But with interest rates low now and for at least the next 6 months, this seems a no-brainer this time around, IMHO.

RandyH, no problem, hope it was some help!

FWIW, I wasn't thinking you come up with the cash for the donations from savings--rather, you could use the extra Netbank $ you said you shouldn't need to pay it up front...you may not want or be able to do that for other reasons, but I just wanted to clarify. <img src="i/expressions/face-icon-small-smile.gif"border=0>

...a very interesting financial concept and definitely worth investigating. Thanks for the post!

A couple of questions though...

#1
<...the prime is now 4.75%, and many credit cards are offering 0% for nine months or more, 1.9% for a year, etc...>

This would only work if we can charge our HEL or mortgage payment(s) with our credit card(s) otherwise it would be considered a cash advance in which case all bets are off on a low interest rate, right?


#2
I'm intrigued with the odd-year itemized/standard deductions strategy.
In general, can we not carry over itemized deductions from one year to the next and use standard deductions for the in-between years in order to place itemized deductions well above the standard deduction limit and thereby maximizing itemized deductions during the odd years while "saving up" our deductions from the even years of standard deductions?

Hi FungPee,

#1 To be sure, any cash advance on a CC is virtually ALWAYS goiig to be a bad idea. The only point of using a CC in my example was to show how a person might implement a strategy like this one even if they didn't have $5-20K in cash up front to prepay netbank. My thinking was that if your credit rating is very good, you might do one of the low or no-interest non-cash-advance balance transfers to come up with the cash.

#2 Yes, itemized deductions can't be "carried over" from year to year, unlike capital gains losses, for example. They are elligible for deduction in the year that a person realizes them, e.g. when a person takes a donation.

Note that of course one could just as easily do standard in even years and itemized in odd.

Again I should stress that the key thing that makes this attractive now is the very low interest rate environment. In a year, the prime COULD be back at 10%, in which case a person would probably be better off holding on to their netbank money as soon as possible (rather than pre-paying...) but with Fed still cutting, the bet is pretty safe that for MOST of the next year at least, interest rates will remain quite low, making this strategy all the better a bet for the 2001-2 cycle.

Hope that helps, Dave

If you don't have a years worth of mortgage payments lying around or of you don't have that much available in free balance transfers from credit cards (most only are free for 6 montsh, what are you gonna do in June?) here is an idea.

You could borrow the money from your 401K and use the funds to prepay your mortgage for the year. You will then pay pack your 401K monthly, with interest. Yes, you'l be paying interest but it will be going to you. The net will probably be a wash, but, if you are already making out your 401K contribution it will be a way for you to get a few more dollars into the account.

Lowcarb,

You could do that. However, a lot of 401k plans let you invest in stocks. The market is down right now. The stocks I invest in are cheap now, so I'm not taking money out now. It might be a better idea if your 401k plan is doing really well now.

DaveHanson,

I think you may be right. I am trying to find holes
in your theory but none found yet. However I need
find a way to verify this (rather than just following
that DaveHandson guy +<img src="i/expressions/face-icon-small-smile.gif"border=0>

Anyone here who are accountant? We don't have many
days left to do this.

cache,

I'm pretty sure it's airtight, but by all means, it'd be great if people with more qualifications than me would care to comment.

Keep in mind that nothing would stop someone from getting almost the entire benefit from this by paying a big netbank payoff after Jan 1, since that's mostly about moving deductables to 2003. However, charitible deductions for 2001 need to close before then so that they count this year.

DaveHandson,

I think you have to mail your mortgage check this year in order
to deduct the interests for year 2001. If you send the
payment during next year, then you 2002 interests will no longer
be zero. The sooner the send the check in the smaller
the amount would be.


I have looked at my last year tax return. My loan is
much larger, thus will alway be above the standard
deduction limit for quite a few years. So I think I
will not prepay my mortgage first. I will buy $30K
of ibond which makes the same 4.5+1=5.5% mortgage
rate.

cache,

I think I'll buy i-bond with money I have left over, too.

RandyH,

you only have a few days left to fill
this year's $30K quota.

cache, yes, if your itemizable deductions will exceed the std deduction for the next couple of years regardless, than this strategy makes much less sense. It's most attractive when you're near the individual/std deduction cutoff.

And you're right that for the interest to count for 2001, the check needs to be received by them and credit by 12/31. My point was that if they recieved a large check on, say, Jan 10 that covered all of 2002's payments and you didn't pay them again until 2003, you'd only pay 10 days worth of interest in 2002 and bump the rest to 2003--pretty close to what the original proposal advocated.

I don't think the ibond idea is a bad one, though I think I am finished buying ibonds myself for the time being. I'd rather than the extra cash available for other deals. 4.4% + any cc rebate is not especially attractive when you need to hold for at least 6 months. If rates stay low for awhile, I'll hold my October bonds for a bit.

hmm..just checked this thread, interesting idea!

The only thing I would be WARY of is, given Netbank's (proven) incompetence, we need absolute positive confirmation that prepaying a year (and sending in all payment coupons) EXCUSES you from paying for all 2002....I have a feeling they want to see a payment come every month,even if you prepaid and reduced principal...

Its a good deal if it works w/o problems, but I have a sneaky feeling that if your payment is $800 due on the 1st of each month, even if you pay $9600 in December, they may still want another $800 payment in JAN! I have not read the other thread to see if anyone has positively confirmed this with someone competent (do they exist?) at Netbank.

SUCKISSTAPLES, funny you should mention that. <img src="i/expressions/face-icon-small-smile.gif"border=0>

I just called to REconfirm with netbank that this is what would happen. I spoke with CSR Takeesha Thomas at Netbank this afternoon, at the 1-888-762-8075 loan service center number. I described exactly what I wanted to do, and had her check with a supervisor to verify how it would be counted. She confirmed that my assessment of what would happen if we did this was correct.

When you think about it, how could it be otherwise, given that it's an increment-based loan? The only thing I could think of is that they somehow could mistake what you were doing as a "prepayment" seperate from your regular coupons. But these 2 folks explained that there IS no such "prepayment" provision for them...every payment follows the same rules--interest, then princpal according to the formula.

Just to be safe, I am including all 10 payoff coupons AND 10 checks, one with each month. (I'll be doing a seperate one for 2002 just before Xmas so that it hits just before new year's.) Since I'll get a copy of the cashed check WITH the notation on it, I'll have evidence that they cashed the checks knowing that they were for this purpose.

Note also that THIS IS WHAT THEY DID when I made 2 payments in November. Their automated phone system and 3 CSRs confirmed that when 2 hit the same day, the first went $299 to interest, rest to principle; the second, all to principal.

No doubt, the frontline CSRs are unimpressive--indeed, this is why I didn't give them a serious look back in September until you cleared up questions they couldn't, and I looked again. <img src="i/expressions/face-icon-small-smile.gif"border=0> But this seems pretty bullet-proof to me.

(Edited to correct typos)

from DH: "they somehow could mistake what you were doing as a "prepayment"


Yup. Thats exactly my concern....

I know if you send all the coupons, mark the checks, etc., it SHOULD work as stated...but I also BET their computers are programmed such that if a payment doesnt come in every month, the loan automatically gets flagged as "late", or "no payment received"...I just have a bad feeling about this...and you know I am all for taking risks.....

this also means the "computer" may mark this loan as a DEFAULT (with your rate going to 18%), until you finally get it resolved with someone competent. And trying to get ANYTHING resolved with Netbank is useless (see Cyberbishops' thread denouncing them)

right now a perfect credit report is ESSENTIAL to me since Im actively purchasing property, and trying to clear up a "late issue" isnt something I want to deal with right now....

plus I question "Takeesha" actually knows what the hell shes even talking about...my gf used to work in a Bank's CS department and lets just say these are NOT the people you want to take financial advise from.....esp. since so FEW people do things such as this...theres no "script" to follow...

Hmm..., SUCKISSTAPLES, your hesitation is a little surprising. I still don't see it:

First, THEY DID IT THIS WAY ALREADY. The computer says I owe no payment till Feb, even though I last paid in November. And this makese sense, since I wouldn't be paying late in Feb--I ALREADY PAID EARLY.

<< I also BET their computers are programmed such that if a payment doesnt come in every month, the loan automatically gets flagged as "late", or "no payment received". >>

Why in the world would they be programmed this way? That would be truly asinine. every time someone paid early enough to skip a month, they'd be hit with a late fee?

Moreover, there's NO reason you couldn't monitor the situation next year (I will) to make sure any foul-up doesn't get so far that it mucks up your credit report. Heck, don't we all do this anyway?

<< plus I question "Takeesha" actually knows what the hell shes even talking about... >>

Reasonably enough. <img src="i/expressions/face-icon-small-smile.gif"border=0> But she went immediately to her manager while I was on the phone (it was business still buisness hours when I called) and confirmed with them the EXACT scenario I'm spelling out here.

<< and you know I am all for taking risks.... >>


Hehe, I sure do! And I'm stunned that even tho you're used to delcaring a prospective rental property "owner occupied," etc. etc. that this perfectly above board, unassailably defensible, even empirically tested bit of financial planning would inspire so much doubt...I respect your deal-making prowess, but I just don't see how this could muck things up UNLESS (a) things went VERY wrong and (b) one IGNORED them going wrong for MONTHS...

Am I missing something?

DaveHandson,

I think suckstaple has valid concern.
I was quoted three times from different
CSR for 5.25% loan and then at the end,
they said, sorry it was a wrong quote.

Many other questions I had to call back
at least three times to average the
answers. They are more polite than
IRS but not better technically.

(I EDITED THIS POST A FEW TIMES..please be sure to reply to the most recent edit)

DH: The idea, its a great one, I just hope it goes through w/o problems, seeing how problematic Netbank always is to deal with...BTW what is the tel # for checking your loan balance and payment due ??

I didnt know the system actually said your next payment is due in Feb instead of Jan. when you paid two coupons. The reason for my concern with the way they compute the figures is that, for many financial instituions, you cannot make a payment "early" or "extra" to avoid a regular scheduled payment. Of course all financial products are different.

Example: If you owe $1000 on a credit card, and the monthly required payment is $50, obviously if you send in $100, you are STILL required to make another $50 payment the following month - you can't say the $100 took care of two months' payments and skip one. You ALSO cant send $50 on Dec 14, and $50 on December 20, (or two separate checks in separate envelopes on the same day) thinking you have made 2 monthly payments, and wont have to pay the bill the following month. They will treat it as a $100 payment for one month and then assess you late fees for making NO payment for the following month. But thats credit cards.

Re mortgages: on a conventional mortgage, any additional principal payment usually brings down the total principal, but you are STILL required to make your regular payment the following month.

Example: Say my traditional mortgage is $800 month, with $100 to principal and $700 to interest w/ a $100k loan balance. If I paid $1600, the same $700 will go to the interest and $900 will go to principal. But while the principal will now be $99,100, I would STILL have to make ANOTHER $800 payment, regardless of my "double payment" the previous month. But again, thats a different loan product.

I can keep giving examples of where you still have to make the regular payments, even if you overpaid a month earlier (such as child support in CA), but you get the idea. I'm not saying it wont work, Im just saying I have never seen any creditor allow a double (or 12 times) payment to "count" as making all regularly-due payments for a specific period of time (even if you include coupons and such).

Another thing to investigate is that I "believe" you can only deduct 13 months worth of mortgage interest per year on taxes (as I always state, I am NOT a tax expert, this is just from facts I heard of which may not be correct), so someone should confirm if this is accurate...

If thats the case, you might not be able to "save up" 24 months of mortgage interest deductions and take them every other year....

SIS,

<< BTW what is the tel # for checking your loan balance and payment due ?? >>

I use the same number mentioned above, 1-888-762-8075, feed it my loan number, and follow the prompts.

<< I didnt know the system actually said your next payment is due in Feb instead of Jan. when you paid two coupons. >>

Yeah, that surprised me too. I didn't even consider this strategy until after I saw that, and confirmed with every person I could find at Netbank that it's standard operating procedure for this loan. I really don't think problems would lie there...

<< for many financial instituions, you cannot make a payment "early" or "extra" to avoid a regular scheduled payment >>

Of course, you are absolutely right. But the relevant comparision is mortgage/ conventional loan products, as credit cards work differently.

<< on a conventional mortgage, any additional principal payment usually brings down the total principal, but you are STILL required to make your regular payment the following month. >>

Right again--IFF the payment is applied to principle. But a mortgage or loan payer has a right to request that it be applied to the next payment OR to principle, provided that they are in compliance with all the other terms of the loan (e.g. if they are in arrears, the loaning agency assesses fees first, then interest, then principle always.) When we send in the coupons, and designate the checks, we make it VERY clear we want it to apply to the next payments. Indeed, it's not clear they would do it any other way EVEN WITHOUT COUPONS, as explained above.

<< Im just saying I have never seen any creditor allow a double (or 12 times) payment to "count" as making all regularly-due payments for a specific period of time (even if you include coupons and such). >>

Fair enough--I've never heard of anyone even trying it before. <img src="i/expressions/face-icon-small-smile.gif"border=0> But keep in mind--I'm proposing making all 12 payments, prior to the deadline, per the terms of their loan, not making one payment 12 times as big. And it's no skin off their nose--they get their money back faster, on average, than they would if they were paid on time. We gain tax benefits, they loose nothing.

<< Another thing to investigate is that I "believe" you can only deduct 13 months worth of mortgage interest per year on taxes >>

Clearly, this would be a deal breaker. I have not heard that, and am not a tax expert either, but I did some hunting on the IRS web site, and couldn't find the 13 month number mentioned anywhere. The athoritative document seems to be

http://www.irs.gov/prod/forms_pubs/pubs/p93601.htm .

It does contain this little gem, paragraph quoted in toto:

"Prepaid interest. If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year. However, there is an exception that applies to points, discussed later."

That says to me that this strategy would NOT work with a conventional mortgage, since by paying off later months earlier, this is EXACTLY what you are doing. HOWEVER, we have VERY clear information that in netbank's case, we are NOT doing this. By prepaying, we are paying principal, not interest...interest accrues later.

Here's another interesting quotation from that document:

"Refunds of interest. If you receive a refund of interest in the same year you paid it, you must reduce your interest expense by the amount refunded to you. If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it."

That says, if I get CREDIT in 2003 for interest (over)paid in 2002, that interest effects me IN TAX YEAR 2003, NOT 2002. What I'm proposing is effectively the exact opposite on this--being billed in 2003 for interest that accumulated in 2002. It would seem logical and appropriate that given that, I should be able to deduct it in 2003...

There might well be some tax reg we are missing. My hunch is that the IRS may not have specifically devised a reg to cover Netbank's funky loan methodology. But heck, if their system says I paid $0 in interest in 2002, but $7,500 in 2003, I'd think I'd be in pretty good shape, no?

I'm not trying to be hard-headed about this, and I really appreicate the scrutiny! If I'm shown wrong, I'll be grateful for having it out now <img src="i/expressions/face-icon-small-smile.gif"border=0>

DH, thanks for the Netbank #...I think you have came upon a great idea, one I would follow as well...you're not being hard headed at all promoting this, if anything I'm the one who wants to be sure to analyze all issues before jumping in...just like my assistance in getting the HEL, your assistance in proving the viability of this technique is much appreciated....

my background and experience has taught me to carefully scrutinize these rules and deals, to see what the possible outcomes are, upon which I make my decisions on whether they are worth doing...from reading the rules on owner occupancy, I concluded the chances of any question arising is small to begin with, and I believe I would be able to satisfy them if called on to do so...with this one, the risk is having to deal with Netbank to correct a problem ..unfortunately the chances of problems with Netbank when deviating from their usual procedures is HIGH, and I am NOT so sure that satisfaction would be so simple! But you know I am all gung ho for "creative" strategies such as this...

As of now, the only possible pitfalls are of Netbank royally #%^ing up (unfortunately odds on that arent too good) and the 13-month mortgage interest deduction limit I heard somewhere...

"if their system says I paid $0 in interest in 2002, but $7,500 in 2003, I'd think I'd be in pretty good shape, no?"

Yes If they said that, that would be GREAT...but theres really no telling what they may report each year until after it happens...perhaps you can be the "guinea pig", making all your 2002 payments this year, and report to us early next year what Netbank calculates as your mortgage interest paid....then we can get a really good understanding of this technique...

I tried to do a yahoo search for the maximum mortgage interest deduction you can take per year, but the results were too offtopic...I'll fire off an email to the IRS about this and see what they say...

PS...have you taken the time to figure out the interest savings or shortening of loan term by prepaying like this, and how great is it?

suckstaple,

>I tried to do a yahoo search for the maximum mortgage interest >deduction
> you can take per year, but the results were too >offtopic...I'll fire off an
> email to the IRS about this and see what they >say...
~


the max interest is $1million, plus
$100K HE.

so it is $1.1M

I think if we promote this great
idea, the IRS will come in and patch
the hole.

Thanks SIS, as always, I appreicate your constructive help! <img src="i/expressions/face-icon-small-smile.gif"border=0>

<< As of now, the only possible pitfalls are of Netbank royally #%^ing up (unfortunately odds on that arent too good) and the 13-month mortgage interest deduction limit I heard somewhere... >>

I'm not sure it's quite that simple, though I'm growing more confident that it will work. I'm not that worried about the 13 month issue, as no tax site I have looked through, including IRS, makes any reference to it. And as long as the netbank folks enter the payments as they receive them, with coupons, the computer should will take care of crediting us OK. HOWEVER, there is still the possible issue of the IRS frowning on this. I posted a message on this excellent tax info message board, and got a mixed reaction. But I'm growing more confident that if netbank reports the interest as paid in 2003, then the IRS will have no problem with it. And there's EVERY reason to believe netbank will do it this way and so far NO reason to believe that they won't.

<< theres really no telling what they may report each year until after it happens...perhaps you can be the "guinea pig", making all your 2002 payments this year, and report to us early next year what Netbank calculates as your mortgage interest paid >>

Agreed. I did call again and ask, "how can I tell what netbank will tell the IRS my interest will be for this year?" Two different folks said, "whatever the automated system tells you is the interest paid for that year." They were quite confident about this, and it's pretty intuitive. Stranger things have happened than this being wrong of course, but the odds seem pretty good to me.

I was thinking the same thing--I could be the guinea pig and report back. Today, I sent off my Feb through July payments, each with seperate checks, papercliped to the corresponding coupons. I should know by late next week whether the automated system has me as paid through July 2002.

If all goes well, and I don't hear any other information about IRS problems, I will send in the rest of the 2002 payments at the end of next week.

<< have you taken the time to figure out the interest savings or shortening of loan term by prepaying like this, and how great is it? >>

Yes, they are fairly modest. The reason is that only a small hunk of your loan is being paid off early, for a one year period of time. Of course, the savings will grow if you did this every other year, but I'm guessing it might not make as much sense after this 2 year cycle, since interest rates won't likely be so low.

(Update: 5/02 the savings actually AREN'T modest, because the interest you're charged for EACH day between the big pre-pay and the next payment is notably less.)

My loan is $99K. Using dukee's spreadsheet posted in the main netbank thread and available here (thanks dukee), I calculate that I would save $769.77 over the life of the loan if I did this prepay ONLY for 2002.

HOWEVER, I'm not sure this figure is quite right. The reson is that the spreadsheet isn't set up to handle the case of extra interest being accumulated like this. It just computes

$795.44 payment - $4757.92 interest paid = -$3,962.48 added to principle

for the Jan 2003 payment. This MIGHT be the exact same as what netbank does, but I'm not certain...any math majors know for sure? As of 4/02, dukee says his payments have been tracking Netbank's charges closely, but mine are a bit overestimated...

Anyway, The nice thing is, EVEN IF ALL GOES WRONG and IRS doesn't let me deduct, I will have given up the use of 10K for only 6 months (on average) and get compensated $770(?) tax free (since I couldn't otherwise deduct it) as a result. Pretty minimal down side, I think.

I will add the terms from the promisory note into my original post above, as that should help give us extra evidence too.

Hi all. I have discussed this in a few other threads. To start, I do not work for the IRS so quit PM me about it. I am a software developer of 20 years. It has been awhile since I have worked on this sooo.. I know that a major bank I was working for was requesting some changes that the IRS had requested. These were IRS requests.

The first was to back out interest paid into two fields interest paid and intereste paid not earned. Several other banks use these terms. the idea was to look at accrued interest receivable at the time payment was made and back out any interest in paid YTD that was not earned.

The other I remember was 1099-w (I think) which was to back out interest reversals from prior years. I'll use this example

I pay a 5,000 check as interest, send it in error

Paid YTD is now 5,000

Year end arives, Paid totals are sent to the IRS and the Paid YTD total is set to 0

Call in, indicate that the 5,000 check was sent in error and you need the money back. Most software cut the file on january 16, unless they post for an extension.

The purpose is example is not for you to do, but to show the holes that are available. The IRS is aware of it and are working to eliminate with ALL financial institutions.

Thanks for your reply, ridn4free.

I'm not sure I understand your post totally. I gather that AFAYK, the IRS is currently requesting banks to make changes that, assuming Netbank followed suit would render this deal unworkable by seperating interest PAID in year 200x from interest ACCRUED (or "earned" in 200x? Have I got that right?

One useful indicator will be the 2001 interest statements we get back from Netbank.

Do you have links to the other threads where you discuss this?

Thats correct DH. Not trying to throw cold water but be aware the IRS has it already in the works. The key will be when Netbank is going to comply to the IRS with a software change. You may make it under the wire. Best of Luck

What a complicated tax system we have!
At one hand I hate the system on April
every year. But on the other hand, I
am pretty interested in seeing the holes
in the systems.

Thanks for the clarification ridn4free.

It seems that if Netbank were to do this, one clue would be whether interest was shown as accrued in 2002. It would hardly be fair for them (or the IRS) to do say, "can't deduct in 2002 since you didn't pay it then, but can't in 2003 since you didn't earn it then."

If you get a moment and have them handy, I'd be interested in links to your other threads on related subjects. Thanks, Dave

Skipping 81 Messages...
No, your fine. I just wanted to point out how they differ.



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