All Forum Posts by: Joshua S.

I guess the math does work out if you choose to look at it in the way you suggest, but I'm not really getting your point. You think that when a person prepays any principal they are essentially getting a new loan with a shorter remaining term and their payment is hypothetically lower. And then because the payment is NOT ACTUALLY LOWER and they're still making the original payment, it's basically like you're overpaying, etc. etc. That's cool.

So, I appreciate that you're able to explain the interest savings and the math behind them in a hypothetical sense, but what does that have to do with what I've said? In other words, your tone sounds pretty negative, but you're basically explaining the numbers behind why I'm right. Prepaying principal saves money and here's a way to explain it hypothetically. Great. You're essentially getting a new loan with a shorter term and doing forced prepayments. But it's also hypothetical - your payment isn't actually lower. You signed up to make that same payment for the duration of the loan, so saying it's hypothetically lower as a way to explain the savings is one thing, but if you're trying to say the savings aren't actually occurring or something because you essentially have a new loan, that's incorrect, so that's where I'm losing you. I'm prepaying on principal and saving on interest - that's happening in the real world - so whether your imaginary scenario explains it the best or I choose to believe the tooth fairy is leaving the savings under my pillow, it's still happening either way, so I don't see what you are getting at. Don't get me wrong - thanks for helping me see where the savings are coming from, I just don't understand your overall point, I guess.

On the other hand, if you try to explain the savings by saying that you "skip" the interest payments that were associated with that $130,000 of principal, here's how I work that out. On the amortization schedule, you skip from $575 to $86.53, which means an average of $331.41 over the saved 281 months. That equals $93,127.61. 

$93,127.61 plus the 30 months savings from before of $15,463.05 equals $108,590.66. That's not perfect, either, but it's much closer to the $105,308 and within a margin of error, so it makes more sense to me. Let me know where you think the savings is coming from in this type of lottery scenario. I like to think about a bulk payment like this, because it tends to simplify things when trying to find out where the savings are actually coming from.

I'm not sure I understand this, Justin. I never got a mortgage than was larger than necessary, I got one that was comfortable and now I'm working on paying it down more quickly. Are you saying that a person who gets a larger loan (so that they don't have to put down every penny they own) and then prepays it as they go is somehow not getting any savings? That doesn't make sense at all. What would you say to a person who buys an F150 instead of a Civic or vice versa? The person who bought the F150 and is paying down their loan quicker to save on interest isn't really saving because they could have bought the Civic? The person who bought the Civic could've gotten a used piece of junk and that person could have bought a bicycle, I guess? 

People get a mortgage for a house they want to live in at a comfortable payment. There are a lot of variables, but they don't have anything to do with this discussion. The discussion is John and Jane Doe already live where they live and want to save on interest and be out of debt earlier and this is one way to do that. 

But in terms of "how" the savings actually occur (which seems to be part of your contention), everyone says that, for example, if you won $130,000 in the lottery and dumped it on the mortgage January 2023, the resulting $105,308 in interest savings basically comes two places:

1. The last 30 months after your lottery payment where you still pay interest, but it's a lower amount and,
2. The last 23 years and 5 months of the 30 year term (the time that you no longer have to pay your mortgage) 

The problem is, I can never get the math to work out, so here's what I come up with and you tell me where it's wrong.

I get an average interest payment over that time of $273.XX and multiply it by 281 months (23 years and 5 months) for the bulk of the savings - $76,715.

The remaining 30 months you are still paying are at an average of $43.56/month of interest for a total of $1306.95 interest that you have to pay on your last couple years.

From Feb 2023 to July 2025 you WOULD HAVE paid an average of $559/month for 30 months which equals $16,770. 

So, over that that last 30 months you saved a total of $15,463.05 vs the normal schedule - $16,770 - $1306.05 = $15,463.05.

$76,715 + $15,463.05 = $92,178.05

$92,178.05 does not equal the $105,308 savings from the calculator. So, I'm not sure what I'm missing or calculating incorrectly. I'm accounting for the lower interest for the remaining 30 months of the mortgage and the months skipped at the average amount you would have paid, so what other savings am I missing that the calculator is coming up with? A difference of $13,130 is pretty significant, I think, so where am I missing savings if that's how it actually occurs?

Hi, Sarah, great job taking the first step. It's always the hardest. Just wanted to answer a couple questions in case others haven't or the answers didn't connect (sorry, I didn't read all the responses). 

Equity is very simple. It's the amount you would walk away from the house with if you sold it - excluding agent fees. So, imagine you are selling your house without an agent or the agent is working for free (your cousin or something). Your house is being sold for $100,000 and you owe $70,000 on it. Your equity - what you would walk away with after the sale - is $30,000. So, obviously, two things can affect the equity in your home - 1. The value of your home. If you could sell the same home for $120,000 and owe $70,000 then your equity is $50,000. 2. How much you owe on the home. If you're able to sell for $100,000 but you owe $60,000 then your equity is $40,000.

ROI is a little more complicated because it involves time, but it's just percentages that most mom and pop investors don't have to worry about. For example, what do you care if you are making 9% or 12% per year on a rental if you were able to get the financing you needed and got a good tenant in it and everything? They are paying the mortgage down for you and hopefully giving you some cash flow beyond that and the percentages are more or less irrelevant. Obviously, if you progress to a higher level you'll want do better with your money, but don't get overwhelmed with it for now, that would be my advice.

Yes, I think you should pay off debt first. First of all, although you have good credit scores, your credit utilization and debt to income ratio will be factors in the bank's decision on financing, so you will look better having paid it off. Secondly, you'll need money for a down payment and it seems like the debt isn't allowing you to save. Once you have it paid off hopefully you can begin to save for a down payment if you can put off buying a car.

I haven't done turnkey (yet), because I pay my rental manager to find me good tenants and I don't want to inherit a bad one. I hate to be pessimistic, but I envision other owners selling a place that has a good tenant and no real issues and I always scratch my head about it. I know there are reasons to get out of good properties, but to me it seems like a sucker's bet. Why not just buy a place that you can walk through and have inspected while it's vacant and then get a tenant who's been credit checked and income verified and so forth? Yeah, it's "more work", but so is going to the salon when you could just give yourself a buzz cut at home. Sometimes the extra work is worth it in my opinion.

I don't think it's realistic to buy a house this year. Personally, I would pay that debt down and do as much education as you can over the next year and then save like crazy. I don't know what your expenses are like, but many people have plenty of cuts they could make like making lunches instead of buying them and so on. You can get a cash back credit card that gives you 2% back on purchases and then pay it off fully every month. That's a way to get free money, I've gotten about $700 back this year with that. I haven't tried this yet, but you could sign up at acorns.com. It's a service that rounds up your purchases and saves the pennies in an account for you. That way you're "saving" but not really missing it. Get a Costco visa and go there for your gas and get 4% cash back, I personally do that. Etc etc. - basically hack your life for savings wherever you can find them and pay off debt and then when you are ready to buy a house / rental you will hit the ground running. Anyway, just my two cents, but hopefully something here will help you. Good luck!

Yes, I do this, but refinancing into a first position HELOC is no good, because you expose your whole mortgage to a variable rate, plus you have closing costs. I got a 2nd position HELOC and just use it to take portions of the mortgage off and pay them down that way, ie. the "chunking" method. No, I didn't use any special software to calculate it. I just take chunks of the mortgage, pay them down and then add more. So far I'm at a much higher pace than I expected and I'm not even sure why, but I'm very happy with it. Good luck.

I do this and I have been very happy with it. The reason it "works" is because you are paying extra principal toward your mortgage, so you can simply do that instead, but I think that misses out on some of the other benefits. First of all, most people try to save and then end up having an emergency or buying something they want or need and the money doesn't get paid toward the mortgage. Secondly, your money is sitting around in a checking account waiting to be paid toward bills and groceries and that's really inefficient. When you do this velocity setup all of your extra cash goes on the mortgage and your checking account goes to zero (hopefully you keep a bit of a rainy day fund in savings), so your funds aren't sitting around - they are working for you all the time. Lastly, you're paying the same amount of money in a different, more efficient way. Most people never consider how slowly they are chipping away at their principal, but when you look at an amortization table it usually takes about 2 years and $20,000 in interest to pay down $10,000, for example, in the typical fashion. When you move that same $10,000 to a HELOC now you can put all of your income toward it and still have access to it in order to pay bills and $10,000 takes 6-10 months and under $1000 in interest to pay off. Again, you can just make extra principal payments, but while you're saving up to do it I've already dumped my checking account and $10,000 from the HELOC onto the mortgage and well on my way to paying it back, so the strategy makes a lot of sense, in my opinion.

Obviously, you have to make more than you spend for any early mortgage payoff strategy to work, but yes, this one works. The thing I always find amusing is that if there was a mainstream mortgage company that did low, fixed rate HELOCs that you could put all of your income toward and still pay your bills, I think people would jump at it, because it's obviously more efficient to have your money working for you automatically. But since you have to sort of jimmy rig a small HELOC together with a mortgage anyone who does it is an idiot and so on and so forth. Anyway, good luck if you end up trying it.

That's weird, I've never heard of that. Do you have any documentation about it? Where did you get this information from? I'm searching on it and I can't find anything about it. Anyway, I'm not going to stay in debt to ward off ambulance chasers, but I appreciate the input and would like to see where you're getting this idea. I will probably always have a HELOC on the place so I can access some of the equity if that makes you feel better.

As far as not getting a good return on your money, people keep saying stuff like that and I can't understand it at all. Go to this calculator below, open up the spot where it says add extra payments and put in one $10,000 payment (not monthly or yearly, just one) and you will see the paid interest go from $136,000 to $110,000 meaning that one extra $10,000 payment saves you $26,000. People say this is just 4.5% over 30 years or whatever and that's fine, but if I put $10,000 down and get $26,000 out of it I call that a 260% return. And it's guaranteed and I'm getting out of debt. How anyone could say that's not a very good return is beyond me. What other investment do you know that pays off like this in a guaranteed way?

https://www.bankrate.com/calculators/mortgages/amo...

That's fair, but I don't see why you can't have both. I have cash flow properties that aren't paid off yet, but someday when these are paid off you think I should sell them instead of continuing to collect on them or pass them down to my kids? Some people would say sell one  and buy 4-5 places, but not everyone needs or wants to own a dozen places. Maybe I'm a homeowner with a few rental properties. I don't see why that would be a bad thing.

As far as being a litigation magnet, I've never heard of that and don't see how or why a rental manager would tell a tenant that or why I would tell the rental manager to begin with. My current rental manager has no idea what is paid off or mortgaged. 

Regarding the checking account - exactly. That's the point I was making to Alexander. If your money is sitting around and mine is helping me save on mortgage interest, I really don't need a lecture on opportunity costs, I guess that's all I'm saying.

No, I really don't want to argue, but Alexander is aggressively telling me I'm wrong yet hasn't actually said anything about any of my points. I'm just making fun of him while trying to understand what he's actually getting at. For example, he cited opportunity costs, but I asked him what his checking account balance is doing for him and he doesn't want to talk about that, just wants to insult my approach instead of discussing anything logically. You want me just to ignore it? I'm trying to understand what he's getting at and I find it funny that someone can disagree with something so vehemently but not have an actual argument against it. Feel free to post a respectful, logical point of view and I will reciprocate.

Not 100% sure, but probably save up the money we're not paying on housing or rent it for cash flow and move somewhere cheaper.