All Forum Posts by: Gary Floring

 You must have good reasons to have a "pets allowed" policy on your rentals....? Can you elaborate on this?

@Wayne Brooks 

The question was,

On a 30 year, $165,000 mortgage loan with an APR of 4.5%, what is RATIO of interest-to-principal paid in the first year of the loan...

???

Two reasons:  

1. By using a line of credit, they would slam down the mortgage balance immediately by a large amount, thus avoiding tens of thousands of dollars in interest AND years from the amortization schedule, the cost of servicing the LOC could be nominal, like $300 or $400. They wouldn't be waiting a whole year to slowly pay down the mortgage by $1,000 per month.

2. By repeating this strategy year after year, they would greatly accelerate the paydown, both in mortgage interest avoided and years sliced off the schedule. Much more so than slowly paying $1,000 per month.

Again, it takes major budgeting skills and discipline to do this, but the strategy is simple in its execution.

Then educate me, please. On a 30 year, $165,000 mortgage loan with an APR of 4.5%, what is RATIO of interest-to-principal paid in the first year of the loan?

Brent,

If a mortgage holder was "house rich but cash poor" they might have some usable equity in their property but nothing in their savings account (sad, but there ARE people who live paycheck to paycheck!).  

In that case, wouldn't they be using "someone else's money" if they took a $10,000 from a line of credit to place onto the mortgage? Yes, they would have to pay it back over the next 12 months from their ongoing income at the rate of almost $1,000 per month, but they would have already avoided tens of thousands of dollars in interest and years of time from their mortgage, correct? 

Then they simply lather, rinse, repeat, and the continue to use another $10,000 from a line of credit each year until its paid off, never having extra funds in their savings account.

Let me know where you agree or disagree with the points above.... Thanks

[FROM A RELATED THREAD]:

@Joshua Smith, "... In the first year of this hypothetical $165,000 / 4.5% loan we've been talking about - when you're whittling away at that first $10,000 - around 74% of your money goes toward interest. When you're paying down the $10,000 on the HELOC about 4-5% of your money is going toward interest...."

And THAT is the major point of the discussion. You can't really compare the HELOC interest RATE to the mortgage interest RATE (APR) because the real key is the AMOUNT of interest paid over time! The point is not how much the mortgage APR is, it is what the ACTUAL interest rate is in the early days of the loan! As you have repeatedly mentioned Joshua, the true "interest rate" in year one is much, much higher than the nominal APR; in this case it is 74%, not 4.5%. Quite a difference! Everyone just skips over this tiny detail, and instead, wants to steer the discussion toward the APR of the mortgage, and then argue about how that compares to the HELOC rate! Instead, the argument should be centered on HOW MANY DOLLARS IN INTEREST IS AVOIDED OVER THE LIFE OF THE MORTGAGE.

The other major point is this. Yes, you could take $10K from your checking account and slam it down on the mortgage to achieve a similar result. HOWEVER,

(a) many people would rather preserve their checking account "cushion" instead of having it applied to the mortgage where it cannot be "retrieved" if needed later. By using HELOC funds instead, or even a zero-percent credit card advance with a 4% transaction fee, they are effectively using the CREDITOR's resources instead of their own money to accelerate mortgage loan payoff (at a "cost" of a few hundred dollars per year). That's another "tiny detail" everyone keeps ignoring. You are using "someone else's money" to accelerate mortgage paydown, not your own. And...

(b), if this method is used year after year, then $10K chunks of money NEVER have to come out of anyone's checking or savings account, because they are effectively using the creditor's funds while repaying them back over the course of a year using this "Velocity Banking" strategy.

(c) It does take major discipline for people to place all of their income into the HELOC or line of credit while ensuring it exceeds their expenses by at least $1,000 per month in order to pay back the $10K within a year. If people cannot budget themselves to do this, the strategy explodes in their face.....

In the Pacific Northwest, rents stayed steady or actually increased steadily. Even while the properties were losing 30, 40, or 50% in value. But many people who lost their homes became renters, thus landlords did quite well. Yes, it took almost a decade for those investment properties to return to their original market values, but in the meantime, rents have continued a slow but steady increase. Thus, buy and hold investors did well, but anyone looking to sell their rentals took huge losses in 2008 and the years immediately after.

Brian, who would you describe the neighborhood? Anything that might cause potential buyers to be hesitant? Also keep in mind this is the slow time of year for real estate transactions.