getting a 2nd mortgage to pay down your first?

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?

http://www.xinc.net.au/calculators/lump_sum.html?ourbris&linkname=13mortgagecalculatorpage_lump_sum_calculator

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

loan amount: 118000
interest rate: 6%
term: 15 yrs
frequen: monthly

lump sum payment (30,000)
after: 5 years

my savigns on the interest on my first mortgage would be $18400 and cut the lenght down by 48 months.

now, the terms for the 2nd mortgage:
http://www.xinc.net.au/calculators/loan_repayment.html

loan amount: 30,000
interest rate: 8%
term: 2.5 years
freq: monthly
payment: prin+interest

yields a total interest paid of $3200.

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

DIFFERENCE IN SAVINGS BETWEEN THE OPTIONS: $3100


so which is really the better option?

Borrowing at 8% to pay down a 6% debt doesn't seem like a good idea to me...

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!

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.

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?

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.

ok to respond to a few things...

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.

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.

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.

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.

It would make more sense for you to get a 2nd job to help pay off the mortgage.

1. To calculate present value PV on $118000.00 first mortgage only:

PV(1st mortgage) = [(1 - ((1+r)^-n))/r]*PMT = 118000.00
r = .06/12 interest rate per pay period
n = 180 months
PMT = 995.75 payment on $118,000 15 year mortgage at 6% interest rate

2. To calculate PV on 2nd mortgage situation:
PV(1st mortgage with fewer payments) + PV(2nd mortgage) = 96049.65 + 22917.35 = 118967.00

PV(1st) same formula above: r = .06/12, n = 132, PMT = 995.75

PV each individual payment on 2nd HEL: (PMT /(1+r)^n) where PMT = 1106.65, r = .06/12, n = month of payment
(PV of Payment in 60th month = 1106.65 / (1+.005)^60 = 820.44) = SUM(2nd mortgage payments) = 820.44+816.36+... = 22917.35

Note: I simplified my previous answer to lump all 2nd mortgage payments as being in month 60. This calculation should be more accurate. The r = the same for both all calculations because it is a discount rate (NOT the rate you are paying on the mortgages). The idea is to look at how much that stream of payments is worth given a certain discount for how much less money will be worth to you years from now compared with today. A higher PV is worth more to a lender, a borrower wants as low PV as possible.

I hope this makes sense.

mauricer, you're going in circles. Speak with a loan officer at any bank and present your premise. You'll feel better. If you still insist that you can make money on this scheme, then go for it.

Too much math makes my head hurt.

Simple solution.

1) Get HELOC and pay down 1st mortgage.
2) Apply for 0% BT cards and pay down HELOC.

Even easier just apply for 0% BT cards and put the money in FNBO Direct, both 1st mortgage and FNBO Direct is at 6% anyway.

Ha Ha, you've all been trolled. This was a bait and follow-on for the stupid computer program masters1 sells for $3500.

You are all suckers for even responding to this stupidity.

delzy said: Ha Ha, you've all been trolled. This was a bait and follow-on for the stupid computer program masters1 sells for $3500.

You are all suckers for even responding to this stupidity.exactly, as soon as i saw this post I thought of the "mortgage accelerator" touts pushing high interest HELOCs to use as checking accts

okay, okay, I get it. A lot of LO's out there troll these sites looking to sell their products. You guys are justified in taking it out on me, the lonely broker of the bunch who MUST be a shark looking to prey on some unsuspecting sap who's too stupid to know any better. Well, here's the truth - I'm not selling any stupid software - I don't think that's the best way to do it (and besides, you can do it yourself without the software.) The product I'm talking about is called the Home Ownership Accelerator. It's ONE LOAN. No software, no HELOC 2nds, just one account. You can google the product and you'll start to find more and more out there on it. I've had a good deal of success with some of my clients (not ALL - this is a sophisticated product and is not for everyone.) I've created a website for the product but obviously can't post it here without getting my whole post removed.

SO HERE's THE DEAL - I'm not begging for your business! You guys obviously have trust issues with me and that's fine. That doesn't change the fact that the product is out there and gaining momentum. I found this post by googling "mortgage checking account" to see how my ezine article was being ranked. I've had some good conversations with Venturion. I again want to state - Home Ownership Accelerator is one loan and is based off the 1 month Libor. PRIME historical average = 10.2% currently at 8.25% 1 Month Libor historical average 4.6% currently at 5.32%. I would tell you the name of the bank that is selling this but I'm afraid my post would get removed again. Check for yourselves. I don't work for the bank that sells this - I'm a broker and use this bank as one of my lenders. Can't wait to see your responses to this . . . .

-Tyler

5.32% is the index only. Every interest rate is made up of an index and a margin. You can buy this loan down to a floor of .75% in which case the fully indexed rate would be 6.07%. The cool thing about this as well is that you don't have to buy the rate down at the begining if you don't want to. you can buy it down at any time. Pretty cool. Now I'm not saying this is the end all of mortgage products. Every product has it's pros and cons. This has a lot of pros but it does come with a price. The margin at par is about 2% which this month would be around 7.30%. As I mentioned you can buy it down to .75% and that will cost you about 2.25 pts. That does make for some hefty closing costs but the break even point comes very quick and can save you a lot long term. This all varies of course depending on how much money you have left over at the end of the month. You most likely wont find rates Walstmonkey - it is a wholesale product. I think they do have som retail divisions but I don't know where.

masters1 said: 5.32% is the index only. Every interest rate is made up of an index and a margin. You can buy this loan down to a floor of .75% in which case the fully indexed rate would be 6.07%.


Two points.

1) FNBO Direct's rate is 6%. Just plunk your money there and avoid closing costs and 2.25 in points.

2) Its just a HELOC in the 1st lein postion. You can do the same thing with no closing costs by just getting a no closing cost HELOC. Or if you already have a good rate getting a HELOC in the 2nd postion and pay the mortgage down some. Of course, if you already have a good rate then see #1.

I suppose if you are moving and need a new mortgage anyway...nope, you can get way lower than 6.07% with 2.25 points with a traditional 30 year fixed and put savings in a FNBO Direct.

Try as I might I can't think of a single reason to get this loan in the current rate enviornment. Maybe if there were some hint rates will start to drop.

masters1 said: okay, okay, I get it. A lot of LO's out there troll these sites looking to sell their products. You guys are justified in taking it out on me, the lonely broker of the bunch uh , are you the OP of this thread using another screename? BC i cant see where anyone commented about you, or took anything out on you, since you just started posting in this thread.

mbustamonte said: This thread is almost hilarious. you really need to sit with someone that has gone through the process, understands the math and all factors need to calculate.

YOU MUST BE WILLING TO LEARN!

This should really shake you up; Did you know you can borrow at 10% (interest only) and reduce your interest cost on a 5.5% Fixed rate loan and pay it off in 1/3 the time?

WOWWA!For that to be true, your average balance of the interest-only loan must be almost 1/2 the balance of the fixed rate loan. Sorry, but most people dont have the cash flow required to be able to pay down their entire mortgage balance for two weeks every month.

A $1k or $2k per week paydown (before redrawing to pay your bills) on a $100k+ mortgage isnt going to have nearly the "amazing" results that you present as being a given.