ded@aplvax.UUCP (Don E. Davis) (10/01/85)
I've been adding an extra $100 to my mortgage payment every month. Ignoring taxes, this is the same as investing this money at 12.5% (my mortgage rate). A pretty fair return (and the money in effect is insured!), but of course it gets locked up in equity, so if interest rates suddenly jump to 20% I'll miss the boat. Here is an alternative I've been considering. What if instead I add the $100 to my car payment (also a 12.5% loan). After the loan is paid off I will continue to make the payment (plus the extra $100) to a savings account so I can buy my next car with cash, thereby saving on the interest. Is this second scenario preferable to the first? -- Don Davis JHU/APL ...decvax!harpo!seismo!umcp-cs!aplvax!ded ...rlgvax!cvl!umcp-cs!aplvax!ded
grl@charm.UUCP (George Lake) (10/03/85)
Rather than pay extra to a loan, buy bonds. They pay the same interest rate as the loan you have, yet you get to deduct interest and take the capital gain!!! A big win!
king@kestrel.ARPA (10/04/85)
In article <161@aplvax.UUCP>, ded@aplvax.UUCP (Don E. Davis) writes: > I've been adding an extra $100 to my mortgage payment every month. Ignoring > taxes, this is the same as investing this money at 12.5% (my mortgage rate). > A pretty fair return (and the money in effect is insured!), but of course > it gets locked up in equity, so if interest rates suddenly jump to 20% > I'll miss the boat. > > Here is an alternative I've been considering. What if instead I add > the $100 to my car payment (also a 12.5% loan). After the loan is paid > off I will continue to make the payment (plus the extra $100) to a savings > account so I can buy my next car with cash, thereby saving on the interest. > Is this second scenario preferable to the first? > > -- > > Don Davis > JHU/APL > ...decvax!harpo!seismo!umcp-cs!aplvax!ded > ...rlgvax!cvl!umcp-cs!aplvax!ded It is probably better to knock down the carloan, unless you have the type of mortgage in which the minimum payment is recalculated if you overpay early in the loan. (I am assuming that the car loan has less time left than the home loan.) The key observation is that, since you obviously have the maturity to keep to a schedule you adopt, you want maximum flexibility which, in turn, means always have the lowest total payment possible. That is consistent with paying off the carloan, unless your minimum mortgage payment is refigured downward after you make a few overpayments. I further claim that when the carloan expires you should dump the former carloan payments into the home loan if you think that interest rates will continue to be below 12.5% on illiquid investments. This can be tempered by your estimate of what rate you will have to pay on the next carloan if you take one out. It pains my typing fingers terribly to type things that might increase the number of car loans in the future, but the joy of turning a 30 year mortgage into a fifteen year mortgage is probably worth taking out a car loan in (say) 1990 that might otherwise be unnecessary. -dick
bukys@rochester.UUCP (Liudvikas Bukys) (10/04/85)
Most car loans are set up so that early payment of the entire balance of principal saves you little in interest. If you read your contract, you will find something along the lines of "Calculation of interest due is subject to the well-known accounting `Rule of Sevens'", or something like that. It might be the "rule of nines". The upshot is that you owe most of the interest even if you pay the balance early. What a racket.
john@hp-pcd.UUCP (john) (10/05/85)
<<<< < I've been adding an extra $100 to my mortgage payment every month. Ignoring < taxes, this is the same as investing this money at 12.5% (my mortgage rate). < Normally ignoring taxes is about as smart as ignoring a warning letter from the IRS, but in this case it doesn't make much difference. If you pay an extra $100 to the bank then you save $12.5 a year in interest and lose $12.50 a year in deductions. That leaves you with the same amount as if you invested at 12.5% and paid taxes on that. If you are in a high enough tax bracket then you might do better with tax exempt bonds but there are very few places where you can buy bonds( or any other high yield investment) in $100 increments. < A pretty fair return (and the money in effect is insured!), but of course < it gets locked up in equity, so if interest rates suddenly jump to 20% < I'll miss the boat. If all your savings is locked up in a house then it may be hard to draw on it in an emergency. I have never taken out a second mortgage but assume that it will take time and cost money. On the other hand I can borrow up to 75% of the equity in my brokerage acount simply by writing a check (current rate is 11.25%).Other investments are more liquid and allow you to move them around to take advantage of changing conditions. If you invest in fixed income bonds and the interest rates go to 20% then thats a boat you WANT to miss. It also would make your 12.5% loan really valuable John Eaton !hplabs!hp-pcd!john
suhre@trwrba.UUCP (Maurice E. Suhre) (10/07/85)
In article <33700010@hp-pcd.UUCP> john@hp-pcd.UUCP (john) writes: > If you are in a high enough >tax bracket then you might do better with tax exempt bonds but there are >very few places where you can buy bonds (or any other high yield investment) >in $100 increments. > Dreyfus has a tax exempt bond fund which is state and federal tax exempt in California. I believe there are other Dreyfus vehicles which are not tailored for California. I imagine $100 purchases are allowed once the account is open. I do not endorse Dreyfus (or unendorse them either!); I merely mention them as representative. Other funds have similar offerings. Maurice {decvax,sdcrdcf,hplabs,ucbvax}!trwrb!suhre
dys@homxa.UUCP (D.SZE) (10/08/85)
< < I've been adding an extra $100 to my mortgage payment every month. < < Ignoring taxes, this is the same as investing this money at 12.5% < < (my mortgage rate)... < < A pretty fair return (and the money in effect is insured!), but of course < < it gets locked up in equity, so if interest rates suddenly jump to 20% < < I'll miss the boat. There are several ways to get more than 12.5% considering taxes. Municipal bond mutual mutual funds are only one way, there are also limited partnerships and others as long as you can stand living without a guaranteed rate of return. I'd pay the minimum of the loan and invest the rest. < If all your savings is locked up in a house then it may be hard to draw on it < in an emergency. I have never taken out a second mortgage but assume that it < will take time and cost money. On the other hand I can borrow up to 75% of < the equity in my brokerage acount simply by writing a check ... I have a second mortgage on my house. My bank lends up to .75 * (value of house) - mortgage. It usually costs $150 to apply, but there are frequent "sales" when you can apply for free. They issue a book of checks to get money. There are no charges if you don't write any checks, etc. The interest rate is prime + 2%, more or less. I rarely have anything borrowed, but since housing in the NY/NJ area has appreciated substantially, it's easy to get a five figure credit line. David Sze Bell Communications Research
ask@cbdkc1.UUCP (A.S. Kamlet) (10/08/85)
> < I've been adding an extra $100 to my mortgage payment every month. Ignoring > < taxes, this is the same as investing this money at 12.5% (my mortgage rate). > < > Normally ignoring taxes is about as smart as ignoring a warning letter from > the IRS, but in this case it doesn't make much difference. If you pay an > extra $100 to the bank then you save $12.5 a year in interest and lose > $12.50 a year in deductions. That leaves you with the same amount as if > you invested at 12.5% and paid taxes on that. If you are in a high enough In Ohio, state income tax is figured on gross federal income less items that the state does not tax, such as U. S. bond interest, and a few other deductions. Ohio does not allow you to take most deductions, specifically interest payments on homes or car loans! So, if you earn $12.5 in interest and have an expense of $12.5, while you break even on that for federal tax purposes, you end up paying taxes on the $12.5 to Ohio. I don't know what other states do. > tax bracket then you might do better with tax exempt bonds but there are > very few places where you can buy bonds( or any other high yield investment) > in $100 increments. -- Art Kamlet AT&T Bell Laboratories Columbus {ihnp4 | cbosgd}!cbrma!ask
gordon@cae780.UUCP (Brian Gordon) (10/09/85)
In article <763@charm.UUCP> grl@charm.UUCP (George Lake) writes: >Rather than pay extra to a loan, buy bonds. They pay the >same interest rate as the loan you have, yet you get >to deduct interest and take the capital gain!!! I must have missed something, here. If I earn interest from owning a bond, what do I "deduct"? That's income. If I sell the bond at a gain or loss, rather that hold it to maturity, I have a capital gain or loss. Unless I am perfect at predicting the bond market, how do I guarantee that it is a gain, not a loss? If I buy a bond at less that its face value -- presumably because someone else is taking a capital loss on selling it to me -- I do get a higher effective interest rate, which is still income, and, I believe, capital gains treatment rather than income treatment for the difference between "selling" and buying prices, but have had to pay commissions, etc., too. Did I miss something else? FROM: Brian G. Gordon, CAE Systems Division of Tektronix, Inc. UUCP: tektronix!teklds!cae780!gordon {ihnp4, decvax!decwrl}!amdcad!cae780!gordon {nsc, hplabs, resonex, qubix, leadsv}!cae780!gordon USNAIL: 5302 Betsy Ross Drive, Santa Clara, CA 95054 *UNTIL THE MOVE* AT&T: (408)745-1440 *AFTER THE MOVE* AT&T: (408)727-1234 Down 69 pounds, and holding ...
gordon@cae780.UUCP (Brian Gordon) (10/09/85)
In article <12073@rochester.UUCP> bukys@rochester.UUCP (Liudvikas Bukys) writes: >Most car loans are set up so that early payment of the entire balance >of principal saves you little in interest. If you read your contract, >you will find something along the lines of "Calculation of interest due >is subject to the well-known accounting `Rule of Sevens'", or something >like that. It might be the "rule of nines". The upshot is that you >owe most of the interest even if you pay the balance early. You are presumably thinking fo the "Rule of 78's". It's not that different from "normal" amortization, at least for typical numbers. People always have problems computing it, but it isn't complicated. The 78 comes from the specific numbers involved in a one year loan. The computations go as follows. Suppose the interest you are paying on a one year loan is $X. How much of a given payment goes towards principal, and how much towards the interest? You could claim 1/12 of it was due each month, or allocate it "perfectly" as proportionate to the amount of principal left ("normal" amortization), etc. The Rule of 78's allocates it so that it is mostly due in the first few months by using the months left over the sum of the months. In the one year case, the sum of the months is 1+2+3+..+12=78. 12/78 of the interest is assumed due the first month, 11/78 of it the second, etc., until the last 1/78 is due the last month. For $1,000 at 18% for 12 months, a simple amortization calls for a total of $100.16 in interest (monthly payments of $91.68). Comparing three methods of allocation: Simple interest Month Amortized Rule of 78's 1/12 1 15.00 15.41 8.35 2 13.85 14.13 8.35 3 12.68 12.84 8.34 . . . . . . . . 11 2.69 2.57 8.35 12 1.35 1.28 8.34 As a borrower, if I pay off after just one month, I'd like to see all but $8.35 of the first payment counted towards principal, but that isn't fair to the lender. Before the advent of computers/calculators/etc., figuring the simple-interest amortization schedule was a pain, and the Rule of 78's isn't too bad an approximation, and is much easier to compute. Paying off two months early? Knock off 3/78 of the total interest ... FROM: Brian G. Gordon, CAE Systems Division of Tektronix, Inc. UUCP: tektronix!teklds!cae780!gordon {ihnp4, decvax!decwrl}!amdcad!cae780!gordon {nsc, hplabs, resonex, qubix, leadsv}!cae780!gordon USNAIL: 5302 Betsy Ross Drive, Santa Clara, CA 95054 *UNTIL THE MOVE* AT&T: (408)745-1440 *AFTER THE MOVE* AT&T: (408)727-1234 Down 69 pounds, and holding ...