ok, i'm not financial wizard, but after looking at this calculator im starting to think this MIGHT make sense, depending on what kind of position you want to put yourself in and for how long?
i know bank of america does 2nd mortgages with no closing costs.
i'd be looking for like 30k for 2.5 years. i would use this 30k to paydown my existing 1st mortgage. if you use that calculator up there with these values
so based on these calculations, the NET total interest I would save by doing this would be $15200.
now... you may ask, why not just pay an additional $1100 (the amount of the monthly payment that would be on the 2nd mortgage) extra on top of my current 1st mortgage payment? http://www.xinc.net.au/calculators/extra_repayments.html
loan amount: 118,000 interest rate: 6 loan term: 15 freq: month extra cont: 1100 start after: 5 years
this yields, interest saved: $18300, and 71 months taken off my payments. the only problem with this however, is that I would need to be making these payments consistenly til the end of the loan, so in this case 10 years * 12 months = 120 months - 71 months = 49 months of consistent extra payments.
or if i do the 2nd mortgage I would be left with
10 years * 12 months = 120 months - 48 months cut down of term = 72 months left
out of those 72 months, for 30 months I would have to make a consistent payment of $1100 to pay off the 2nd mortgage, but would net $15200 in total interest savings.
so here is the summary, which is a better options:
SCENARIO 1: do a 2nd mortgage result: for 30 months pay consistently $1100 on the second mortgage, will leave me with a total of 72 months on my mortgage and a total net interest savings of $15200.
SCENARIO 2: extra repayment result: for 49 months pay consistently $1100 in addition to what I currently pay. this will leave me with a total of 49 months on my loan, of which all 49 will require that consistent payment of $1100. this will yield a net interest savings of $18300
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I didn't review all your math, but you can't borrow at 8% to pay off 6% debt and come out ahead. You're missing a time value of money calculation somewhere in there.
Or, if you can make the extra $1,100 payment, put it in a HYS for 2.5 years. If you get ~5% interest, you will have close to $28k, a very nice little cushion for a rainy day!
When I read your title, I thought this was some sort of fancy math to help out subprime borrowers to stave off the inevitable for a few more years. (Take out 2nd mortgage, use proceeds to make payments on both mortgages, etc...)
Personally, I always look at total cost, but apparently OP is trying to look at something.
Usually the loan is not truely $0 closing costs, but rather $0 out of pocket where as the closing costs are rolled into the principle of the loan.
berlinsmommy said:Or, if you can make the extra $1,100 payment, put it in a HYS for 2.5 years. If you get ~5% interest, you will have close to $28k, a very nice little cushion for a rainy day!
For the same reason that OP should not borrow at 8% to pay down 6% debt, he should not invest for 5% while not paying down the 6% debt.
It makes ZERO sense for you to "finance" any of your 6% mortgage with 8% paper. Since you have sufficient cash to make your planned second mortgage payments, I would simply fold them into your existing loan.
While I agree that 8% vs 6% might be too much, the savings would be realized, in general, because of the difference between an amortized loan vs. simple interest loan. Isn't HEL also amortized and a HELOC is simple interest?
anthonyu said:While I agree that 8% vs 6% might be too much, the savings would be realized, in general, because of the difference between an amortized loan vs. simple interest loan. Isn't HEL also amortized and a HELOC is simple interest?
Not always. I have a HEL with a fixed rate that is simple interest through a credit union.
You can't always believe the result an online calculator gives you. I did a few quick calculations in excel (nothing fancy) and came up with the following:
Option 1: $118000 at 6% for 15 years with no extra payments
$995.75 per month for 180 months Total Payments = $179235
Option 2: At beginning of year 5, take out $30000 at 8% for 2.5 years and pay towards principal on first loan
$995.75 per month until end of loan $1106.65 for 30 months for second mortgage Total Payments = $164290 SAVINGS: $14945
Option 3: At beginning of year 5, pay extra on first mortgage for 30 months, then return to normal payments
$995.75 per month for 60 months $995.75 + $1106.65 per month for 30 months $995.75 per month until end of loan Total Payments = $162994 SAVINGS: $16241
In reality, the payments and interest would probably vary from my calculations by a few dollars. But the way I figure, paying extra toward your 1st mortgage should save you about $1300 over your odd "borrow at 8% to pay off 6%" scheme. Add closing costs to that and your plan makes even less sense.
berlinsmommy said:anthonyu said:While I agree that 8% vs 6% might be too much, the savings would be realized, in general, because of the difference between an amortized loan vs. simple interest loan. Isn't HEL also amortized and a HELOC is simple interest?
Not always. I have a HEL with a fixed rate that is simple interest through a credit union.
So if he gets a simple interest HEL, he can potentially save a little even if it is 8% vs 6%.
1. CLOSING COST: i worked for BOFA (specifically with home loans/equities) and yes, the closing cost really is 0. the interest is usually prime +/- .25 on average depending on your LTV and a few other things )ie: do u have checking with them, will u do direct payments... can each take another .25 off your interest rate.
2. SAVINGS VS PAYING DOWN: it would not make sense as someone pointed out to instead of paying down a 6% loan to put into 5% savings.
3. AMORTIZED VS STANDARD INTEREST: my math was done with both examples being amortized loans. HELOANS are generally amortized. Here is the thing though
I rather be paying an amortized loan of 30k at 8%, than paying a 118k loan amortized at 6%. meaning, if you take that amortized 30k at 8% and use it to paydown 30k from that amortized 118k loan at 6%, you will realize about $15-18k savings - dependent on which of the 2 scenarios of the ones i mentioned in my original post you do.
like i said, im not a financial analyst by any means so i may be missing something somewhere, that's why i posted this here to share some thoughts and ideas.
also, keep in mind that it's important to note at what time you make this downpayment. doing it after 10 years would be pointless, since during the amortization process by that time you will owe so much less in interest (the amount of your regular payment that goes to principal vs what goes to interest) that the downpayment won't have much effect in terms of total interest savings going forward.
based on an amortized loan for 30k at 2.5 years my total interest paid will be approx $3200. do an amortization table to see the results. this means that to put a 30k downpayment towards my mortgage it would cost me $3200. by doing so however, im taking 4 years of interest payments off (as of today, which is probably 6% of about 90k principal) of my original loan of 118k.
mauricer said:2. SAVINGS VS PAYING DOWN: it would not make sense as someone pointed out to instead of paying down a 6% loan to put into 5% savings.It depends. By paying down your mortgage, you are investing an ever-increasing amount of money into a single asset: your house. Keeping your portfolio diversified among a number of asset classes is a best practice.
For example, what happens if you pay down your mortgage to 0 ahead of schedule, and interest rates rise so savings accounts are returning 7%? Don't forget that a 6% mortgage is quite low if you look at historical figures.
ha, jayk.. you bring up a good point as well and actually something i was thinking about.
2 issues:
what makes more sense, investing the money or using it to paydown or borrowing money out of my retirement for a year (no penelties etc).
issue with that is, what can i make with that same money in the market (my opportunity cost). can i make more money with it in the time period that I borrow it for versus the total amount of money i would save by using it to paydown my mortgage? by taking the money out of my retirement i would be paying 8% in interest to myself. anybody know of any potential issues with this, tax related or anything else? it's just a thought....
I can yield probably around 8% in the market, my retirement stuff is somewhat limited as far as what kinds of investments i can play with so that's why i say 8% yield.
on 30k of retirement cash i could come out with about $2400 during the 12 months of time i would borrow the funds for. this whole scenario is kinda unrealistic though, because i cannot afford a 30k loan for 12 months - even if it's to myself lol. (it could pnly be for 12 months bc after 12 months i would get penalized)
a lesser amount however, like 12k.. i could probably do. so with 12k i would yield $960 during the 12 months in APY, or instead save on my 1st mortgage interest during the life of the loan in the amount of $8750 and cutting the term down by 20 months. which one makes more sense? unless im completely overlooking something... using the 12k from my retirement for a year (assuming no penelties, and the interest paid is to my self in the amount of 8%) doing so would probably give me the best results.
granted its $8500 in savings versus the original discussed 15-18k by doing a loan, but it's another option i guess?
JAYK: "what happens if you pay down your mortgage to 0 ahead of schedule, and interest rates rise so savings accounts are returning 7%?"
well, if i paydown my mortgage ahead of schedule - which is my biggest expense - that will leave me to dump all my income into those new 7% earning savings, no?
Present value using 6% discount rate of $118,000 15 year mortgage with 6% interest = $118000.00 Present value using 6% discount rate of your scenario to take $30000 2.5 year 8% 2nd HEL to pay 1st loan = $118623.28 You are going to lose $623.28 in today's dollars by trying this plan.
For you 401k loan plan: What happens when the market is down and you lose your job? You get the choice between paying off you loan immediately or paying the 10% penalty. It sounds like it has some risk.
as far as loosing my job i have 20+ years seniority so i would hope others would get the boot before I did. plus I have a union behind me so that always helps.
i am more concered about present value/time value of money etc. ill have to do some investigation.
can u show ur calculation for the loss realized (approx 600)
The ONLY way to come ahead here would be to refinance your 6% loan at an interest rate thats HIGHER than 10%. If you only get an 8% loan thats not worth it. Try and get a 10% or higher interest rate loan for the second mortgage. Then if possible refinance to a 3rd mortgage for 15% or higher a few years later.
im not sure that your understanding my logic behind this. did you do the math calculations on those links provided?
i understand that 8% is greater than 6% and that this seems to make NO sense what so ever. but doing these simple calculations seems to show otherwise.
the only thing im really curious to is what REALLY makes more sense, doing the 30k down right away or simply doing the 1100$ additional payments.
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