All Forum Posts by: Joshua S.

@Joe Splitrock Or maybe an even simpler way to show the skipping thing is to pull up the same loan on the calculator and put in a one time extra principal payment of $288.16 (the principal portion of the first payment) on the first month. The total interest on the loan goes from $143,739.01 to $143,075.53, a difference $663.48 - the same amount due ($666.67) on interest for that portion of principal. I don't know why it's not "exact - I think it's because of the "time" factor and the fact that when you pay additional principal you're "skipping" interest, but you're not choosing which interest you're skipping. When it's recalculated with the slight difference in time and principal balance it comes out a few dollars off. In other words, stretching out a different balance over the same time frame is bound to change the calculation a little, but I don't think it's statistically significant.

But do a bunch of examples and it works out close enough that I can't see how another explanation would make as much sense or be as accurate. The principal portions of the first five months comes to $1450.46. The interest portion comes $3323.71. When you put in the $1450.46 extra payment the total interest goes from $143,739.01 to $140,431.07, a difference of $3307.94 - within $20 of the $3323.71. But like I said, if you think there's a better explanation, let's see it. If this is wrong I'd be happy to see where the savings really come from.

I don't think you understand the explanation of the skipping thing, so I'll try to explain. 

Go to bankrate's amo calculator to verify this if you want. I was going to add screen shots for each step, but it's too much work for someone who's just going to blow it off and misunderstand it. :)

https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

$200,000 / 30 Year / 4%

Total interest scheduled on day one: $143,739.01

Put in a lump sum $10,000 early principal payment for month one (Sept).

New total interest scheduled: $122,431.31

One $10,000 early principal payment saves $21,307.70 interest and 32 months off of the loan. You can try another calculator if you want, btw, and there are slight differences in the assumptions / calculations, but they all come out to roughly the same savings.

So, the question is where does the $21,307.70 savings come from. If you want to say that the interest payments aren't being "skipped", that's fine, but you need to be able to explain where the savings comes from.

Well, first of all, you're saving about $33.34 each month after that first payment compared to what you were going to be paying. But $33.34 x 32 months is only $1067. Or if you want to consider that you saved that amount for the entire duration of the loan, then $33.34 x 360 months is $12,002.40, so that doesn't account for the savings, either.

Maybe it's the last 32 months of the loan from Jan 2048 to Aug 2050. During that time the range of interest is $3.17 to $96.45 and that's an average of $49.81. Obviously, $49.81 x 32 is only $1593.92 so that can't be it. 

How about we bundle all of those savings together to see if that explains it. Well, that's only $14,663.32. You can show your math on where the savings comes from, but unless I've missed some place that the savings could be coming from, I don't see where you're going to come up with the right amount.

So, here are at least a couple screen shots for you. Notice that when I put in the $10K payment, the following month's interest is $632.37.

Now if I take the $10K payment out and scroll down to the spot in the amo table where I would normally be paying the $632.37 (July 2023) the month before that my total interest paid is $22,108.14. If you subtract the $666.67 worth of interest from the first month's payment it comes out to $21,441.47. Obviously, when you're recalculating interest like you said, it's a function of how much you owe, so the calculations aren't exact in comparisons, but I'm within about $100 of the $21,307.70 we're trying to find (and there are 33 months between the first payment and July 2023). 

So, when you make that additional $10K payment, you are "skipping" down to that spot on the amo table and all the corresponding interest is skipped, as well. If you're still struggling with that idea imagine that you signed up for this mortgage and then won the lotto the following day. You "owe" $143K of interest, but only if you keep the money for the 30 years. Actually, it's not even correct to say you owe it, because it accrues daily. You "owe" more each day that goes by and gets added into your bill for that month, but until you "owe" the interest it's "scheduled". If you win the lotto and pay off the loan on day two you don't pay the interest, because you're paying it off early. You pay the principal and "skip" all the interest payments, because you gave the money back early. 

If you need even further confirmation, here's one for you. Imagine you signed up for this loan and then the following day won $190K and put it all on the mortgage. Your total interest goes down to $851.95.

And here's your new amo table. Do the math yourself, it comes out to $851.96. You paid the first month's payment and then SKIPPED over the others and needed to pay the last 11 that come out to $185.29. You'll probably try to say that when you pay the $190K you're actually saving the other $142K in interest over the next 29 years or some other wacky BS because you're immune to simple, rational explanations, but I'd be willing to bet that that math doesn't work out as well as this does. And even if it did, that's the equivalent of using a fire hose to water your lawn as far as explanations go.

A simple way to look at is is that if I use a coupon at the store and SAVE MONEY ie. DON'T SPEND IT, then I'm not earning it back later on or something - I DIDN'T SPEND IT. That's how I saved it. It's the same thing here. When you pay back principal early, they essentially apply a coupon / discount for paying it early. You aren't spending the corresponding amount on interest and therefore you SAVED / DIDN'T SPEND IT, you're not earning it back later or something. Saying that you skip over corresponding interest payments when you pay principal early is a very simple, accurate way to describe where the savings is coming from and hopefully you understand it now. If not, please provide an equally simple, accurate way to explain the savings.

I don't really understand what we're talking about anymore, so please kindergarten me at this stage. Maybe post some pictures with arrows or something, if possible.

The average person lets money sit in their checking account (absorbing the opportunity cost of doing so) and then pays full, mind-numbing interest on their 30 year loan. Again, talking about the average person here.

My strategy pays 4% interest, because my spending money is working for me at all times depressing the amount of interest I will pay. 

I need to make more than I spend, but other than that I don't have to have any extra money lying around to do it. Even if I have a small amount of disposable income, it automatically goes on the mortgage AND the rest of my income holds my balance down temporarily. To simply "pay extra principal", you need extra cash lying around that you won't miss.

There's absolutely no risk with my strategy. HELOCs get closed when a person goes under water and the bank is afraid they will lose their money. I didn't put a new kitchen on the HELOC or take on any other debt. I'm using it to build equity FASTER than before, so if my house value drops it will take that much longer before I'm under water. And if I suddenly became under water and the bank closed the HELOC then I'm in exactly the same amount of debt I was in previously minus any gains I made with the strategy. I have my savings, investments, and credit cards for the next two weeks and then I get a paycheck and I'm back to square one where I let my money sit around and gather dust like you do. There's absolutely no risk involved. You're saying things like the strategy is cash negative and you have no emergency funds - those are incorrect guesses on your part that you can't seem to let go. I have plenty of cash, investments, credit cards, and other backup. I'm simply doing this with the money that was sitting in my checking account.

So, the thing is, you're saying you have all these issues with the semantics of how youtube scammers present their argument blah blah blah - great. I'm not a youtube scammer and I couldn't sell you anything if I wanted to. I'm simply trying to help people understand that doing it your way isn't as efficient as doing it my way and I've proven that. I've proven it to the point where you've had to invent a hypothetical scenario (THAT YOU DON'T DO) where a person puts all of their disposable income on the mortgage to compete with what I'm saying. We all know that no one does that, but instead of comparing my strategy to what the average person does, you've invented a strategy that no one uses. That's mental gymnastics, my friend. Then when that didn't even work you had to claim that there's a bunch of risk doing in my way and there isn't. There are a lot of ways to tap dance around when someone else is right and you don't want to admit it, but you're a master.

Now listen, my way is clearly better so I think we should get off of that unless there's anything else you want to clarify. Here's what I would like to key in on if you're up for it. When you say that paying principal early doesn't skip over interest payments, what do you mean by that? Thanks.

Sorry, Joe, but I think you're missing the point, so I'm going to try to simplify this to make sure we're on the same page.

A. When you use $1K of your disposable income to pay down your principal, you end up paying less interest than you would have.

B. When you use $1K of your disposable income to pay down your principal AND you put the rest of your income on the mortgage temporarily you end up paying EVEN LESS INTEREST than scenario A. Maybe the difference is $1 or $2, but the effect of paying the same amount of extra principal AND having a lower average daily balance means you will pay less interest in scenario B than in scenario A.

Does this look correct to you? Both A and B are true, right?

I don't think cash flow is important at all at first. When I was single I bought a house and got a roommate. I considered him my first tenant, we just shared the place. The whole point of real estate investing is getting access to OPM - Other Peoples' Money. If you're getting OPM AT ALL, you're in a better position than before you were getting OPM. The reason is because they are spending their time / effort earning the money and then handing it over to you because you own something they want access to. If you have a roommate, a duplex, single family, multi family, it doesn't matter as long as you're getting OPM. Once you START the process you can refine your techniques, become more efficient, increase your cash flow, etc. and become profitable, but basically ANY FIRST STEP TO GETTING OPM is a good first step, in my opinion. Having to live in your first deal for a year - especially at your age when you have that flexibility - is not a big deal. I envy you in that way. Try living in a duplex for a year once you have a wife and kids. Personally, if I were you, I would do this deal and after the first year do it the exact same way and get another one. Someday you won't really be able to live in them. Later.

Don't pay off the existing rental. When you have a mortgage on your primary residence it makes more sense to pay it down faster, in my opinion, because your mortgage is one of your largest expenses and really affects your cash flow. But on rentals the leverage actually works in your favor. When you purchase rentals you can almost think about it like the lender is your partner / investor. They put up 80% and you put up 20%, but you have to manage the whole thing. Once things are settled and you have saved up enough you can buy another one and so on. If you're in a hurry to pay back their investment, you're not able to buy other rentals and that should be your focus.

I know what you mean about doors, because I live in the same area and it's tough around here, but be patient. I think there is a financial disaster around the corner and things will get cheaper in the coming years. I think you're in a perfect position to buy duplexes and live on one side for a year and then move back home and rent out the other side, so that's what I would look for if I were you.

I agree. HELOC is a no-brainer, because I don't think I paid a dime for mine (except maybe an appraisal fee or some trivial fee), whereas with a refi you have closing costs. Plus, the HELOC isn't costing you anything until you use it. I don't think I will ever get a refi if I can use a HELOC.

 Option C. Good choice. You're welcome, you're welcome. Take care now. :)

Just to clarify my last post, I guess what you're saying is that when you give them the $100K back, THEY need more money to purchase the proverbial can of coke, so you're in essence short-changing them. They're not getting a very good return, because they're sort of burying the money in the house that you bought and when they dig it up 30 years later it's worth half the amount (they need twice as much to buy the can of coke). I guess that's the part that I was missing initially. Interesting. Mortgage lending, then, is a losing proposition, because in a sense they're burying their money and it's worth less when they get it back. They are paid back with interest, of course, but that doesn't necessarily make up for what is lost in the inflation. Crazy. 

I was leaning more toward thinking that since you're paying them back with a "devalued" dollar you'd be the one getting less purchasing power, but the principal doesn't go from $100K to $200K in that time, it stays the same. In a sense you're giving them back less than you borrowed when you factor in inflation. It's like you're asking your kid brother for $20 and then giving it back to him in 30 years when it's practically worthless. It's a good thing that lenders' balance sheets aren't accountable for inflation, because you know they'd stick us with inflation AND interest. Thanks for pointing this out, it's a great catch.

I always find inflation so interesting and almost "confusing" in the sense that there are a couple different ways to look at it. For example, if I bury one dollar today and dig it up in ten years it has lost value in the sense that it's purchasing power has gone down, but it's still ONE DOLLAR - it hasn't changed. So, another way to look at inflation (that I find much less abstract) is that the dollar hasn't lost any "value" at all, but things have gotten more expensive over time. In other words, inflation is a function of price increases rather than value. I can take that dollar today and buy a can of coke, but if I want to buy the SAME CAN OF COKE IN TEN YEARS (this is key), I need to dig up that dollar plus add another 50 cents or whatever. Either way, the can of coke that goes in my tummy has exactly the same "value", but the cost / price went up over time. My mom always told me she could never fathom that a can of coke used to be a nickel and now it's a dollar, but remember - same exact product / value in your tummy, but the price went up.

If you need another example of this, think about a house or a car. Its "value" is that you can live in it or drive it to work, but this is separate from the price you pay to own it. If I pay $100K for a house and then the "price" goes down in terms of how much I can sell it for, but I can still live in it, has it lost any "value" or did the "price" go down? I would argue that the price went down and the value has stayed the same, which is another reason why I prefer to look at inflation as a matter of price movements instead of a matter of value. In other words, it's less abstract, but I think it's also more accurate. Even if no one will buy my house and the "price" is $0, if I can live in it the value is the same. I think people confuse the two ideas.

Anyway, if I apply that idea to what you're saying here, the lender has given me $100K and I've given him back $100K + 4% ($71,869.51) in 30 years. According to SmartAsset's inflation calculator, $100K today will be "worth" $209,757 in 2050 (@ 2.5% avg yearly inflation), but think back to the can of coke and examine what that means. If I bury the $100K and dig it up in 30 years, now my giant, fancy can of coke will "cost" me $209,757, but it's the same can of coke just at a higher price. Same as before, when I'm digging up the money, I need to add to the amount to make the purchase, but I'm getting the same goods either way.

To me, it almost seems like you're saying you'll be able to buy a bunch of cans of coke down the road, but it's the same can of coke whether you buy it today or in 30 years, it's simply way more expensive if you wait. You can correct me if I'm misunderstanding, obviously, but when you're talking about sort of multiplying your money because you're paying less back to them in real time value, that's how I understand your point. When you think about the idea that you're getting the same goods either way and just paying more in the future, I don't see how you could sort of be multiplying your money / getting over on the lender with leverage.

The funny thing is, I feel like it made a lot of sense reading what you wrote, so I'm not necessarily differing with you, but when I examine it through this other lens I'm not sure which way is right or if it's just two ways of explaining the same thing (obviously compounded by the idea that I'm not sure if I understand your point). The only other thing that I would say is that viewing it through your perspective, if lenders are barely hedged against inflation, how would they ever make any money? It seems like a losing proposition to loan out money and then essentially ask for the rate of inflation as your compensation. That seems to point to my explanation, doesn't it? Thanks.