All Forum Posts by: Gary Floring

 Wooden stakes, silver bullets, 24K gold crosses....NOTHING seems to kill off this thread! 

Now watch someone come along after to this "bump" it back to life.... ;-)

Except for one tiny detail: you're not paying off a fixed 4% loan. That is merely the NOMINAL rate, otherwise known as simple interest rate, or APR. You should consider the ACTUAL interest rate over TIME, otherwise known as the Total Interest Percentage over the life of the loan. Huge Difference!!!

 How about this scenario, using your analogy:

The guy originally signed a contract with his employer that he would work for 5,000 hours total [i.e., the "principle"]. The contract requires him to put in at least one hour per day, and at least five days a week, so he's on the hook to work at least 5 hours per week, or approx. 20 hrs. per month [i.e., his minimum "monthly payment"].  At that rate, it will take him almost 20 years to fulfill the contract. But the contract DOES allow him to work more if he wants to, as long as the total ["principle"]  is 5,000 hrs. Note that his commute time is ONE HOUR each way, so he spends TWO hours of commute time [i.e., "interest"] to put ONE hour of time [i.e.., "principle"] into the contract each day.

So the guy says to himself, "At this rate, I'll be paying extra [i.e., "interest"] for my transportation costs back and forth, my daily lattes and snacks at the building, a new wardrobe and shoes every year, AND an extra TWENTY YEARS chained to a job that pays extremely well, but I hate the idea the idea of spending all that extra money [i.e., "interest"] for incidentals, the time commuting, AND time at the office. In fact, my commute time [i.e., "interest"] alone will be over 10,000 hours!!!"

Then he decides that he'll accelerate the contract in a much shorter time, like maybe 5 years instead. So he starts putting in many more hours per day and per week, thus accelerating his required total time [5,000 hrs. in "principle"] into a much shorter ["amortization"] schedule. Won't he thus "save" over 15,000 hours of [i.e., "interest"] time commuting, not to mention all the other incidental costs? 

 ahahHAHAHAHA!!!  

Although that is a gender stereotype, it seems to be true!  My experience has been that most women are absolutely unnerved by the mere sight of a spider. Males don't particularly like spiders, but are usually not terrified of them. At home, I get "the yell" about once of month to "COME KILL THIS SPIDER!!!"  So in comes dad with a tissue paper to capture the offending arachnid. The daughters stand by at a safe distance as the grab is made.  Before flushing it down the toilet, I will sometimes hold the wad of tissue up and say, "does anyone want to see the ...." and before the sentence is finished there are screaming girls running from the scene!

This statement may help clarify what is causing he disagreement/misunderstanding/arguement, etc. in this thread. 

It follows that if a lump sum of $10K is paid to the mortgage in the second year, it would decrease the total interest over the life of the loan (for the second time) by another large amount (~$29.5K or thereabouts). If repeated in year three, it would decrease the total interest paid over the life of the loan (for the third time) by another large amount (~$28K or thereabouts). And so on, every year. I think everyone will agree with this pay-down scenario, the numbers of course being approximated.

Here is where the breakdown may be occurring...

Although the mortgage APR is "nominally" in the single digits, proponents of the rapid paydown are using the "ACTUAL" Total Ineterst Percentage (TIP) to base their ROI. In the case of Joshua Smith, his TIP is 67%. But that TIP is over the LIFE of the loan, not the first few years. Since interest is much greater than principle at the beginning of the amortization schedule, the "effective" TIP for that early period is much higher than 67%. Thus, the nominal APR is not used to calculate ROI.

Therefore, the argument is that by paying down the mortgage quickly in the early period of the loan, the savings (in interest never paid, or "skipped") amounts to several tens of thousands of dollars. In this case, almost $90K in interest payments are "skipped" in three years. Compared with the extra principle paid ($10K per year), the ROI is being calculated (assumed) to be greater than 100%, due to the Total Interest Percentage (NOT the APR) in the early years as being in the triple digits.

Please correct this >100% ROI assumption and provide the actual ROI for scenario above.

Nathan G is correct on the fact the law prohibits the sharing of a credit report with other parties, even those who have a stake in the process (the landlord). In fact, I have had mortgage lenders and auto loan finance departments tell me that they cannot legally share with me MY own actual credit report even though I paid for it when applying for credit!!! They will, however, provide me with my FICO score, but not the credit report itself. Ironic, isn't it? 

Maybe its a scam by the major credit bureaus to make money each and every time a credit report is pulled. If everyone in the screening or underwriting process started sharing reports, the credit bureaus would lose out on credit report fees.

Ryan Jones, you said:

"The irony of this is that the guy opposed to paying interest on mortgage debt as if it's a bank scam is the sucker paying more interest by exchanging the low interest mortgage debt with higher interest HELOC debt."

Actually, he seems to be proposing just the opposite. Although his primary mortgage APR is in the single digits, his TOTAL Interest Rate over the life of the loan is 67%. If that is the case, then the interest rate during the first few years of the primary mortgage must actually be well above 67%, since the P&I monthly payment is overwhelmingly interest, not principle.

Therefore, he is using a lump sum from a HELOC that costs approx. $400 per year in interest to pay down a primary mortgage by several years, effectively skipping (never paying) several tens of thousands in interest. The point being is he is paying a service fee (HELOC interest) of a few hundred dollars per year to eliminate tens of thousands in interest on the mortgage that will never have to be paid, due to accelerating the amortization schedule.

How does that equate to "paying more interest by exchanging the low interest mortgage debt with higher interest HELOC debt." ???

Is this John A Sims the same one who has his mugshot posted at http://mugshots.com/US-Counties/Michigan/Kent-Coun... ???

Out of state properties always have higher risks because you normally have to hire a property manager who's main interest is collecting their commission. Although in theory they are protecting your interests, the reality is they sometimes cut corners to get a tenant, sometimes MARGINAL tenants, into your rental!

I had one PM who tried to convince me to approve a certain tenant for one of my rentals. The applicant had a spotty credit report, and her income-to-debt ration was very low. When I told the PM no, she badgered me about how this poor applicant really needed a place to stay...she had little kids...she was supposed to get a  big promotion soon, yadda, yadda, yadda. Needless to day, that PM was replaced pronto! 

If you are just starting out with rentals, I recommend you stay local and manage your own properties. Once you acquire a larger portfolio, then perhaps you should consider non-local rentals, but at the cost of hiring a great PM.