All Forum Posts by: Ben Zimmerman

@Scott L.

Please cite your references then, because this goes against what I have personally experienced when I made additional monthly payments, and goes against literally every google website that I have viewed.  Are there mortgage loans that are calculated daily?  -Sure there are simple interest mortgages out there, but the traditional mortgage that 99.9% of people use is calculated on a monthly basis, which is good for the consumer because it is the generally the cheaper option of the two.

@Joe Splitrock Yes, most people realize you can choose the day you pay, generally this is done due to the reasons you mentioned.  What most people don't realize is that you can also change the actual due date (and thus the pay date) on all of the bills.  If you read the screenshot from my electric company it says, "The due date you select becomes the date your SRP payment is due".  Here is another screenshot from my credit card that shows the revised due dates if I so choose to alter it.

Which bills exactly can you not move?  Credit card, telephone, electric, all of these bills have the option to move the due date to whatever day you want, (up until the 28th of the month, thanks a lot February...)  Which means your average bill would generate only 2 or 3 days worth of interest per month on the heloc.  This turns a hypothetical 5% heloc loan rate into something closer to a .5% interest loan if utilized properly.  

Also, you mention you didn't like my example of a 100k house and a 10k monthly income.  However these numbers don't matter and you can choose whatever you like, maybe 200k with a 10k income?  How about a 300k house?  It makes no difference, the only thing that matters is you are taking a small part of your average 4.75%ish mortgage, and turning that portion of it into an effective sub 1% loan by moving your due dates and utilizing a heloc effectively.  

@Scott L.  Mortgages are typically calculated on a monthly basis.  This is easily verified with a simple google check, or by looking at the balances on any mortgages that you might have that you make bi-monthly payments instead of the traditional method since a bi-monthly payment would pay a portion of the balance at different times of the month.  The amortization schedule matches a bi-monthly schedule exactly up until the point where you reach a month where you made 3 payments instead of two which obviously pushes you ahead.

@Joe Splitrock I completely agree with you in that the benefit is relatively small, and that the risk may outweigh the reward.  In fact I don't use this method myself and have no intention of using it in the future.  

However, this is an educational forum, it isn't a playbook that spells out step by step instructions of what people should do.  In the end it doesn't matter if someone uses the method or not, it only matters that they were informed about a strategy and then evaluated their lifestyle and financial position and determined if it was worth implementing or not based on their own unique circumstances.  

For the previous 9+ pages (of what I've read) it has largely been people on one extreme or the other about the topic.  Some were bashing the technique saying that it doesn't work and that it is all smoke and mirrors with flawed math, while others seemed like snake-oil fanatics claiming it will pay off your loan in under 7  years and that everyone else "just doesn't understand".  I didn't intend to persuade anyone that the method was worth it and that they should use it, only that the method can work.

If people choose to use this technique or not is up to them.  (I will continue to choose not to).  But acknowledging the fact that it can work is a necessary first step for the reader to determine if it is worth implementing.

@Joe Splitrock You are misunderstanding me. In my scenario you are not making extra 10k / month overpayments. This is in stark contrast to what @Brian Cardwell has been saying, in his arguments you do make overpayments and the loan gets paid off ninja fast due to those overpayments and not because of the heloc.

In my scenario, in the FIRST month you do make a 10k payment towards the mortgage (in the amount of your monthly paycheck), but this is because you will eventually pull that same money right back out via your heloc. So it is a 10k payment, and a 10k withdrawl, which means there is a net of no additional payment as you still have a 100k total loan (90 on the mortgage, 10 on the heloc). All months after the first you make the mortgage payment completely as you normally would, and your 10k monthly paycheck goes towards paying off your heloc balance in it's entirety. If done properly you should only have a balance on your heloc for a few days at the end of the month, and will be paid of in full on the first of the next month with your paycheck.  This prevents that 10k paycheck from sitting in your bank account earning no interest until it is time to pay bills, and instead immediately goes to pay down the mortgage, and then only costs you interest when you finally decide to withdraw the money via your heloc for a few days at the end of the month to pay those same bills.

I will attempt to show this in the attached spreadsheet. The first tab is a standard 100k loan at the stated 4.75% interest rate with no overpayments.

The second tab is the same 100k loan using the heloc method. On day 1 of the first month, you make a 10k overpayment, and will then take that money right back out via your heloc to pay your bills. This translates into a 90k balance on your mortgage, and 10k heloc so there is no actual overpayment since all 100k is still accounted for, it is just split into 2 different balances instead of one singular 100k loan. You will pay interest on your heloc balance, which if you can push your bills back far enough into the month to only pay 1 week worth of interest, that turns a 5.9% heloc into an effective 1.37% loan. This means each month you will pay roughly $11.47 in interest, and an extra $8.33 in heloc fees if your lender charges $100/year to keep the account open. Over the life of the loan this means the heloc will cost you a little over $5700. This means that you will pay roughly an extra $19.81 / month to your heloc using this method. Under this scenario your loan is paid in full after 24.25 years.

Tab 3 contains a regular 100k loan with monthly overpayments in the amount of $19.81 per month to simulate what would happen if you made an overpayment in the amount that your heloc costs you each month. Under this scenario your loan pays off in 27.75 years, or 3.5 years SLOWER.

Tab 4 is my feeble attempt to show the flow of money into and out of the heloc. The basic premise is that your paycheck gets direct deposited into your heloc account, and you use your heloc to pay all of your monthly bills.  You want to push all of your bills back as far into the month as possible before paying them in order to pay as little interest as possible. Each month when you get paid, you want your paycheck to pay off the entire heloc balance such that nothing stays on your heloc for more than a handful of days.. If done properly this allows you to keep a very low balance on your heloc for the majority of the month, and a very high balance for only a few days at the end of the month. In my scenario I said that ALL bills were due on the 23rd of each month. Obviously real life scenarios will be more messy since some bills will have different due dates, but this gives you the basic idea of how the system should work.

Summary: Everyone who advocates doing very large chunking on a heloc that takes many months to pay off is incorrect, because if a balance remains on a heloc for the full 30 days, then simple math says that a 5.9% loan is worse than a 4.75 loan. However, if done properly and in small enough amounts such that you do not carry forward a balance from month to month on the heloc, and instead only keep a balance on the heloc for a handful of days then it can be very beneficial as it takes a portion of that 4.75 loan, and turns it into an effective 1.37% loan.  The method is obviously dependent on how far back into the month you can push the majority of your bills, as this lowers the actual amount of interest that you will pay on your heloc balance.  Also, the higher your household monthly earning, the better this technique works.  As a family that earns 10k / month will be able to shift more onto their heloc than a family earning 7k / month.  Also it goes without saying that it depends on the interest rate of your heloc versus your regular mortgage, and how much fees your lender charges.  This method isn't magically going to eliminate decades from your loan, but for some people, under the right set of circumstances, it can be beneficial.  

Heloc Loan spreadsheets

I believe I already explained it, many people on this thread seem to (incorrectly) advocate doing large chunks on your heloc of lets say 30k, and carry forward balances on their heloc from month to month taking a year to slowly pay down that heloc until they are able to repeat the process, in which case you are absolutely correct, the heloc is a more expensive loan in every single way.

However, if instead you do smaller chunks to your heloc, in the amount of your monthly pay checks such that your entire heloc balance gets completely paid off each month, set up your paychecks to go directly towards paying your heloc, and use your heloc as you would a normal checking account, and move your bills to the end of the month then it is actually a smarter way to do things.  This is because with this method, the majority of the time you have no balance at all on your heloc since you moved your bills to the end of the month.  With this method roughly 3 out of every 4 weeks there is no balance, meaning you only pay roughly 1 week worth of interest.  or (7/30)*5.9= 1.37% per month.  

So which would you rather have, 100k loan at 4.7%, OR a 90k loan at 4.7, and a 10k heloc at an effective 1.37?

This method isn't some magical way to pay off your loan in 7 years, however it will take 2-4 years off of a standard 30yr loan without having to make additional over payments.  Given how rare it is for a loan to run its full term, it could be debated that the hassle of setting it up isn't worth the relatively low gain, however if you know that you will keep the house for the full 30 years it IS the smarter way.

Being a math major, and the frequency that this topic seems to pop up, I thought I would dig into it a little bit because there are still usually shreds of truth hidden amongst the false information.

TLDR:  A heloc, under the right circumstances, CAN speed up the loan payoff for some people, however done correctly it will likely only shave off roughly 3-4 years off of a 30yr note.  It is not some magic formula to cut decades off your mortgage unless you make significant overpayments, (in which case you wouldn't need the heloc in the first place).

The basic premise of "chunking" large amounts onto their heloc which people seem to promote is false.  It does no good to trade 50k worth of mortgage debt at 4% to a 50k heloc at 6% that keeps revolving from month to month and takes a year to pay down that heloc before doing the process again.  Simple math says that 6% > 4%.  However, if instead of taking large chunks, if you take smaller chunks (equal to your paycheck) the process can work.

As an example, lets assume that a married couple has a total income of 10k/month, and keeps 2k in the bank for emergency funds.  Lets also assume this couple gets paid once per month on the first of the month.  Typically this would mean their bank account spikes up to 12k on payday, and then slowly starts to trickle back down to 2k as the month progresses and they pay their bills.

Instead, what they could do is set up their bills such that all of their bills except the mortgage, are due as late in the month as possible.  We will assume the mortgage is due on the first, and all other bills, (credit card, utilities, cable tv ect) are all due on the 20th.  Now they will open up a heloc with at least 10k available limit, and during that first month pay the full 12k that they have in the bank towards the mortgage.  At this point they have an empty heloc, no money in the bank, but 12k paid towards the note.  On day 20 when all of the bills are due, they will pay the all of their bills by tapping into their heloc.  This will max out their heloc at 10k, which stays maxed for roughly 10 days until they get paid on the first of the next month.  This paycheck goes to paying off the heloc in its ENTIRETY, any additional amount owed on your heloc that revolves into the next month is a bad thing.  Now we are back to the original situation, where the couple has no money in the bank, and an empty heloc.  Rinse and repeat this process for the next 26 years or so and the mortgage will be paid off, and then replace the original 2k that the couple had in the bank.

This process does not involve making large 'over payments'.  The only extra amount that you pay would be the 75-100 dollars a year or whatever amount your bank charges for its annual fee for the heloc.  This translates into about 7 bucks per month, which even if you didn't have a heloc, and instead paid that 7 dollars over your mortgage per month, it would only shave off somewhere in the neighborhood of 6 months of your typical priced mortgage.  Where as the heloc method would likely save 3-4 years.

The reason this process CAN work under some circumstances, is two fold.  First, the couple had 12k in the bank right after payday (2k emergency funds and 10k paycheck) which is wasted money that is neither earning interest, nor saving interest.  Using the heloc method, this money is immediately put to use to pay down the loan, and using the heloc at the end of the month to pay bills.  The other reason is that while the heloc rates are higher than the normal mortgage, the amount of time that the heloc is being utilized is less.  Keep in mind that in this scenario, there is only 10 days out of the month that interest is being accrued by the heloc.  So instead of the 10k being on your mortgage for the entire month at 4%, you are moving it to your heloc for 10 days at 6%, (which prorates into an effective 2% over the course of a full month).  This means that the heloc is paying less overall interest even though it has a higher interest rate.  These two reasons (while small reasons) slowly start to chip away at the mortgage and speed up the process ever so slightly.  This process would save a few years off of a typical ~200k loan.

Obviously this entire method is dependent on the exact terms of your origianl loan, your heloc rates, how far back into the month you can push all of your bills etc.  Is it worth going through the hassle of setting all of this up to wipe out 3-4 years of mortgage, or the possibility of a heloc being frozen?  That is up to you.

A few things to be careful about, getting a second FHA loan in a year isn't guaranteed. There are a handful of reasons why you could get a second loan, relocating 100+ miles away, or significantly upsizing your home due to a growing family ect, but simply waiting a year and getting a second loan isn't necessarily going to work unless you refinance that first loan. Also if you plan on using a second FHA to purchase your single family home, then there wouldn't be any equity for you to take a credit line out against that home.

As far as which is better the duplex or the quad, I would probably say in this case the duplex is the safer bet (assuming the two deals are equally good numbers wise). I say this mostly because it sounds like you are working with limited capital, so it would be wiser in my opinion to start slow, and keep some reserves instead of simply buying the most number of units you can under FHA right away.

The government has owned the vast majority of land in all of the western states.  Including 70% in AK, 45% in CA, 53% in OR, 48% in AZ ect ect.  

The reason being is that a lot of land simply wasn't usable for farming / ranching so during the westward expansion of the united states this land went unclaimed by settlers because nobody wanted it.  There was a limit on how much land could be claimed by any one person to prevent abuse, which made this land useless because it couldn't be easily farmed.  Some areas could support livestock, but it required such vast expanses of land for the cattle to graze on that individuals were not able to claim nearly enough land to make it viable.  Which is why for centuries the government has leased this land to ranchers such as the Bundies that made national headlines a few years back over territorial disputes with the government.

Land is periodically sold back to the public as the need and demand arises, however there are other issues at hand outside of a developer looking to annex a few thousand more acres for condos.  The most glaring issue is water rights.  We like to pretend that growth can continue forever, and is an unstoppable force.  However the reality is that with current technology, there just isn't a good way to supply many more people.  Lake Mead supplies 90% of the water to Vegas, and has been consistently losing water levels over the years.  Current regulation prevents new construction homes in the area from planting lawns in the front yard, and limit the total grass that can be planted in the rear as well as other regulations to conserve water.

There is a limit to how many people can own a swimming pool in the middle of a desert.

*DISCLAIMER*  I am not a CPA, please do your own research, however I think some things previously mentioned are slightly incorrect.

First off, you should definitely pay your kids.  Income shifting is a valid technique to reduce your taxable income at a higher tax bracket, by moving that income over to your children who will pay little or no taxes on their income.  This is especially nice since the standard deduction just skyrocketed to 12k, meaning the first 12k of income that the earn will not be subject to taxes.  Realistically this should cover their entire income for the year since even if you pay $10/hr, your kids would have to work almost 25hr/week in order to cap out at 12k which your kids probably aren't going to work anywhere near that many hours.

Also you 'probably' shouldn't have to worry about them paying SS or Medicare taxes either.  Per guidelines from the IRS: "

Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Refer to the "Covered services of a child" section below."

https://www.irs.gov/businesses/small-businesses-self-employed/family-help

Since their income likely won't be taxed, it is a perfect candidate to start their Roth account.  They can contribute up to 5500 annually as long as they have at least 5500 in actual earnings.  This money can be accessed early and withdrawn penalty free for education expenses for college assuming the account has been open for at least 5 yrs, or 10k for the purchase of a home, (may still need to pay tax at time of withdrawl).  But if they don't need the money for school then they will have 50+ years for that money to grow tax free and will set them up well for retirement.  Or the money can be used for a 529 plan which is probably better way to strictly fund a college account.

The numbers are probably fine, however the way it was ran, the tenants, and the overall condition of the property are what would be worrisome.

Weekly rentals tend to be S*holes, how much deferred maintenance is there?

Currently he is clearing roughly 2300/month in rent after deducting utilities, which at 115k purchase price is at the 2% mark, assuming @Joe Villeneuve's calculations of 550/month in cashflow is accurate, that puts it at roughly 23% CoC assuming 25% down payment. So unless you have some crazy high taxes or insurance rates you should be profitable. If someone is a few months behind in rent they need to be evicted immediately, but that is a management problem, not a problem with the building itself. The good news is it's usually it's pretty easy to get rid of tenants with a weekly lease.

If you can keep the same rental amounts, but change it to monthly billing with a decent quality of tenants you should be good to go.