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Need a car - Have other debt obligations... Help!

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plush
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Need a car - Have other debt obligations... Help!  Reply with quote  

Hi everyone! I'm hoping for some sage financial wisdom. Here's what we're working with:

    • 29 year-old married couple expecting first child next month
    • Gross $180,000 per year as Realtors - NET $130,000
    • Own 2 homes - 1 is a rental at $350/mo cash flow, other is modest 3 bedroom
    • $33,000 in the bank - should be $45,000 by next month
    •Paid off $105,000 in student loan debt, still owe $48,000 @ 6.8% interest (oops).
    • No consumer debt, drive two 15 year-old high-mileage pieces of garbage, no loans.
    • Lifestyle costs $3,200/mo to maintain (mortgage, health insurance, food, entertainment, insurance, everything).


I am unusually and unreasonably afraid of going belly-up financially, but I need a new car. With the arrival of our daughter next month, it would be nice to replace my problem-ridden vehicle with something that doesn't have 175,000 miles on it. My mental safety net is $30,000 in the bank (is this too high considering our income and expenses??), and my intended budget for the new car is <$12,000.

I also want to eliminate our student loans this year. I don't see that being a problem either way (before or after car purchase), but I'm wondering if I should finance the vehicle and redirect $10k to the high-interest student loans, OR if I should pay the car in cash and work on the student loans next. I hate debt but don't have 6 figures in the bank to accomplish everything at this time!

Thoughts? Opinions?

Thank you,
Post Mon May 23, 2016 4:47 pm
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oldguy
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quote:
but I need a new car. With the arrival of our daughter next month, it would be nice to replace my problem-ridden vehicle with something that doesn't have 175,000 miles on it.


Our newest car, a 2006, just clicked on 196,000 miles today. So I may not be the right guy to ask about replacing a car that has only 175k on it? LOL. But it mostly depends on the cars that you select - literally any modern car will give you 200,000 miles of trouble-free service. But some do it better than others - Japanese cars are designed for maintenance free service, just turn thhe key and go. Conversely, the German cars are designed for high performance, the engines/trannies are being pushed close to their design limits - that requires lots of preventive maintenance, tune-ups - and a few break-downs.

quote:
My mental safety net is $30,000 in the bank (is this too high considering our income and expenses??), and my intended budget for the new car is <$12,000.

I also want to eliminate our student loans this year. I don't see that being a problem either way (before or after car purchase), but I'm wondering if I should finance the vehicle and redirect $10k to the high-interest student loans, OR if I should pay the car in cash and work on the student loans next. I hate debt but don't have 6 figures in the bank to accomplish everything at this time!


Even if you did have the 6-figures laying around, prepaying debt might be a foolish way to spend it. If you kept your loans and invested $100k at 11%/yr, it would be about $2,300,000 at age 59. And if you refi'd your two houses and liberated another $100k of equity, it would be $4.4M at age 59. You're in Real Estate, use leverage. I continually refi'd our 4 houses over a 40 yr period, whenever rates and equity was positive. Each time i invested the equity elsewhere.

"I hate debt" is an emotion, emotion has caused the financial failure of lots of people. < I recall in the 1970s when the market was flat for several years - the urban buzz was 'if I can ever get my money back I'll never again buy stock". And they didn't - meanwhile, the US had the greatest run ever from 1980 to 2000 - and they missed the whole thing > Avoid emotion, use your math skills. In my case, my math made me wealthy.

BTW - Here's how I buy cars -
2 options - (1) I could sell $33k of my stocks, use $3k to pay cap gains tax on profits, and use the $30k to buy a new car.
(2) Or, I could finance the $30,000 car for 5 yrs, and leave my $33,000 in my fund where it typically doubles about every 6 years. Furthermore, I sell our old car privately for $3k or $4k and add that money to the stock fund - where it too should double in 6 yrs (Rule of 72). I haven't paid cash for a car since 1985 (jimmy carter).
Post Mon May 23, 2016 9:45 pm
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plush
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Thank you for the advice! I really struggled with this yesterday, but you make good points. You're right about debt. I know there are multiple avenues to wealth, and stock/fund investment is one viable avenue. I also get what you're saying about opportunity cost.

I'm personally a big fan of real estate since it's backed by a tangible asset that you can live in, but the cost of entry is high, it requires maintenance, management, and is less liquid than owning shares. On the upside you get cash flow, appreciation, depreciation benefits among other tax benefits, etc, and can match or beat the S&P's track record via the cash-on-cash rate of return for non owner-occupied investment properties. If you don't mind me asking, since I can tell you have spent a great deal of time learning about and planning your family's finances, why did you stop at 4 homes? Regarding your cash-out refinances on your rentals for investment capital: did your cash flow still cover the equity lien(s) you secured against them, or did you have to pony up the difference in debt service knowing that your gain on the new shares would significantly offset it?

If the strategy is to buy and hold, and never sell, what is the end goal with your stock ownership (I saw you mention this in a previous post)? I'd love to be worth $4.4MM at age 59 as you stated, but unless I'm collecting dividends that can match the cash flow of the real estate I'd be able to own free-and-clear by that time, I'm just not sure I'd prefer paper value over $10,000+/mo coming in as my retirement income. Maybe there is another way I ought to be thinking about this.

Back to the car replacement.. Since I'm collecting about $350 per month in cash flow on my rental, I could technically have the tenant buy my car for me by keeping the auto payments around this dollar figure. Would you advise this? Is this how you'd look at it?
Post Tue May 24, 2016 2:53 pm
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oldguy
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quote:
beat the S&P's track record via the cash-on-cash rate of return for non owner-occupied investment properties. If you don't mind me asking, since I can tell you have spent a great deal of time learning about and planning your family's finances, why did you stop at 4 homes?


Lots of people are in that 'tangible asset' camp because they can see/feel a house - but the Law of Investing applies equally to both real estate and stocks - risk & return are directly proportional. Real estate is much easier to leverage because it is so common, many or most people borrow 80% of their house. It's way harder to ask a bank for a $250,000 loan to buy stock. I combined them - it wasn't difficult to continually refi my houses and remove equity - and RE mortgages provide the best loans, very low rates and very long fixed rates (30 yr).

The refi's did two things for me - (1) it reduced my RE equity (so if a house appreciated $20k one year, that would be a 100% return-on-equity if I had only $20k invested. (2) that gave me seed money for investing in stocks.
And that's why I stopped at 4, the seed money that the houses spun off was making more money than the houses.
And I liked the diversified portfolio of about 50% real estate 50% stocks, that worked well - most years either the houses or the stocks made money - and some years both made money.

As for 'paper' gains (unrealized profit), I tracked Net Worth - I had a good job, a steady income stream, so I didn't want additional taxable income, I wanted more unrealized capital gain. My houses appreciated tax-deferred. And my stock funds appreciated tax-deferred. So for us, a good year would be $100k gain on the houses, $100k gain on the stocks, and spending nearly all of our remaining taxable income stream on family.

People often vacillate between 'having fun now vs saving for future. There is no need to choose, you can do both fairly easily. The concept is to direct your income stream to its highest and best use.
Consider a goal of a million dollars in 30 yrs. If you try to 'save' $1M, it will cost $34,000/y for 30 yrs. But if you 'invest' for $1M it will cost $5000/yr. (@11%/y).
That difference is HUGE, almost no wage earner family can afford the $34,000/yr, so they give up, don't try. But almost all middle class wage earner families can invest $5000/yr (actually $4000/yr out-of-pocket of you use a deferred fund, 401k, IRA, etc).
Post Tue May 24, 2016 3:51 pm
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littleroc02us
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I'm in my mid 40's, but I can still relate to your issue. My wife and I have 2 children, make a good living at our jobs, own a rental duplex, invest in 401k's, 529's and roth IRA's. We have a fairly high networth for our median ages and have done it through a different method then Old Guy's which involves a lot more risk. We also have no debt except our the two mortgages on properties which by ratio of mortgage to purchase price is quite low.
We pay for our 5 to 6 year old vehicles with cash, we live in a modest home compared to our peers, we don't buy elaborate items, we vacation very inexpensively and we put 25% DP on our first investment property that nets $800 a month. I also hate debt and move at a turtles pace when making important decisions. We don't borrow against our homes or rental property, we save every penny we can from extra jobs and through our regular jobs. So I commend you on your ability to pay off half your school loans and to pay off debt.

To answer your question, I'd buy the car with cash since you'll have 45k in the bank soon. Why not take 15 of that 45k and put it towards your school loans. You'd still have 30k as an EF. Then push to pay off your Student loans asap. When all debt is taken care of, you'll easily be able to put aside cash for the next DP on an investment property. You don't need to be in such a hurry to accomplish everything at once. Your advantage from Old Guy and mine is time, your only 29. Take it slow and you'll become wealthy beyond your imagination.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed May 25, 2016 3:51 pm
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plush
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Thank you for the thoughtful reply; I can definitely relate to your approach. It blows my mind how few people think about money and plan in the way that you and oldguy do. Though you guys have different philosophies, I see value in each.

Old guy, you make some excellent points about emotion clouding sound decision-making. I've made very bad financial decisions in the past and am motivated by fear (emotion) to approach finances with a more Dave Ramsey-esque mindset nowadays. When I was younger, my folks encouraged me to finance anything I wanted and, as a result, I've financed 4 vehicles, a private grad-school education, laptops, etc--all before age 23. I love them dearly, but I eventually learned that taking financial advice from people that finance furniture and refinance houses to buy depreciating luxury items (airplane in 2006) isn't really a good idea. Following in their footsteps required me to change my career path, relocate to a cheaper state, and experience years of self-induced poverty in order to get on top of my finances, so fear of falling back into the same trap is a hard one to shake.

My wife and I have spent a great deal of time talking about this since I started this thread. We both agree that peace of mind trumps a potentially higher rate of return (in other words, we will not stick our capital in mutual fund and hope to hit 11% while our student loans run us 6.8% to keep around). This represents too much risk to me for the return since the simple rate of return is 4.2% in this scenario (11%-6.8%). That said, the reality is we will soon need a new vehicle.

If we plopped $15,000 on our student loans now, that's a guaranteed return of 6.8%. If we financed 100% of the $15,000 vehicle at a fixed 1.99%, our return would then be a guaranteed rate of 4.81% (6.8%-1.99%=4.81%) rather than a hopeful and speculative 4.2%. Of course we're not taking advantage of compounding interest via the stock investment approach, but I'd rather push that out a little while longer and not attempt to arbitrage between a stock investment and a non-asset-backed debt that will not go away unless we both die.

We've got about $48,000 in commissions coming our way within the next several months - not counting the deals we'll put under contract before those ones close. Though it's awfully tempting to use that capital to pick up a duplex with a cash flow of 500-800/mo (which would pay our monthly student loan debt obligations), I think I'd feel more comfortable knowing that I don't have a $50,000 anchor that higher returning investments have to drag around. From there, we can decide whether to dump money into stocks, save for a cashflowing investment property, or both.

Dave Ramsey slapped some sense into me back in 2011 and was extremely helpful with curbing my blind spending, but I also realize his approach is more tailored to the completely risk-averse wage earner that is in a very different position than we currently are. I am not opposed to leveraging non owner occupied homes in order to pick up additional rentals, but I wouldn't do it on our primary residence. Those that didn't get eaten alive in the recession are the ones that had their money right in their primary home and didn't go crazy with leverage.
Post Thu May 26, 2016 5:02 pm
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oldguy
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[/quote]1. Dave Ramsey slapped some sense into me back in 2011 and was extremely helpful with curbing my blind spending,

2. We both agree that peace of mind trumps a potentially higher rate of return (in other words, we will not stick our capital in mutual fund and hope to hit 11% while our student loans run us 6.8% to keep around). This represents too much risk to me for the return since the simple rate of return is 4.2% in this scenario (11%-6.8%). If we plopped $15,000 on our student loans now, that's a guaranteed return of 6.8%. If we financed 100% of the $15,000 vehicle at a fixed 1.99%, our return would then be a guaranteed rate of 4.81% (6.8%-1.99%=4.81%) rather than a hopeful and speculative 4.2%.
quote:


1. And the DR method was correct for the 23-year-old-you that needed discipline and order. The 'debt-free' method is perfect for breaking the credit card & easy finance 'I want it NOW' cycle.

But for the 29-yr-old you, 'debt-free' is not so good, consider the end-game - you direct all income to paying cash - and you end at age 65 debt-free but with no wealth.

It may be time for you to switch from debt-free to the wealth-building phase of life. Note that your comments all contain emotion - peace of mind, too much risk, guaranteed rate of 4.81%, speculative. Take the time to quantify risk level (as opposed to 'too much', or 'high'. As for 'guaranteed' - true, but does 'guaranteed' make it 'good'? Ie, should a 29 yr-old's goal be to get 4% guaranteed - or does that mean that you are guaranteed to not get 10% or 11%? Personally, during all of my wealth-building years, I avoided 'guaranteed'. Instead, I took risks that I was able to manage.

As for financing cars - as I mentioned earlier, I haven't paid cash for a car in years even tho I'm wealthy, I finance cars to SAVE money.

You mentioned real estate - one nice thing about RE is that you can dial in whatever risk that you want. Eg, if I wanted to place $200,000 in RE, I could (1) pay cash for one $200k rental house or (2) I could split my $200k into 5 - $40k chunks and make down payments on 5 rental houses. Two risk extremes - (1) no leverage and (2) 5:1 leverage. Or you can choose any risk level between those two. A big part of risk management is to determine that level.



Post Thu May 26, 2016 10:19 pm
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plush
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quote:
....But for the 29-yr-old you, 'debt-free' is not so good, consider the end-game - you direct all income to paying cash - and you end at age 65 debt-free but with no wealth.

It may be time for you to switch from debt-free to the wealth-building phase of life.


Oldguy, you make excellent points. I consider myself a logical, analytical person, but you're right--my entire approach has had an emotional undertone rooted in fear, and that has come at the expense of more systematically analyzing and managing risk. It has paralyzed us for a while now. In our paralysis, we played cleanup at the expense of acquiring.

I'm curious to hear your thoughts on student loan refinancing. Right now, our two remaining loans are held with GreatLakes. The interest rate is 6.8% across the board. We may be able to refinance these loans (I'm guessing somewhere between 3 - 4.5%). The pro to keeping them with GreatLakes is that I can call them in a pinch and ask for a payment postponement regardless of where I'm at with deferment/forbearance allowances, in case we fall on hard times. The con is that this flexibility comes at that higher rate. If we refinance the loans, we lose the payment flexibility/deferment option but secure a significantly lower fixed interest rate. It seems to me that we could create our own "insurance policy" against a lean few-months or a financial catastrophe by having our EF also contain 3-6 mos worth of these payments. What would your approach be?

Our original gameplan was to:

1. Keep 30k banked as an EF
2. Finance the new vehicle (modest 15k purchase, nothing outrageous, 1.99% over 60 mos). Sell old car for $5,000 and pay down student loans with it.
3. Throw every dollar over 30k at the student loans
4. Once loans are paid, save 25% down for a duplex or SFR for cashflow. Repeat and ultimately/simultaneously balance against cash investments in S&P500.

I'm thinking this might be a better approach now:

1. Keep 30k banked as an EF still
2. Finance the new vehicle. Sell old vehicle for $5,000 cash. Cash sits in savings as down payment capital.
3. Refinance the student loans to the lowest rate/longest term available (which would you prioritize? I want to minimize interest costs without wrecking my DTI for future mortgage qualification)
4. Buy rental. Use the rental cashflow to take care of the monthly student loan debt service.
5. Pick up additional rentals. Refi the cash out for reinvestment in additional rentals or stock investment as equity growth allows.

What are your thoughts? Also, where would you "park" your money for 6 mos-1 year while saving up a down payment on a rental? We're having a good spring/summer in the business and expect to sock away $60k or more into savings over the next several months. That's plenty of capital to pick up a duplex whose cash flow will handle the SL, and I see that as being a better long-term solution than paying off SLs with no real asset to show for it. Thoughts?
Post Sat May 28, 2016 7:51 am
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oldguy
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quote:
at the expense of more systematically analyzing and managing risk. It has paralyzed us for a while now. In our paralysis, we played cleanup at the expense of acquiring.

I'm curious to hear your thoughts on student loan refinancing. Right now, our two remaining loans are held with GreatLakes. The interest rate is 6.8% across the board. We may be able to refinance these loans (I'm guessing somewhere between 3 - 4.5%). The pro to keeping them with GreatLakes is that I can call them in a pinch and ask for a payment postponement regardless of where I'm at with deferment/forbearance allowances, in case we fall on hard times. The con is that this flexibility comes at that higher rate. If we refinance the loans, we lose the payment flexibility/deferment option but secure a significantly lower fixed interest rate.


Over the past 50 or 75 yrs (I'm 77) I've seen the public move to cookie-cutter finances. Ie, safety, 6 months living expenses, low debt, always pay cash, lots of gov't 'programs'. And I've watched that same public (especially the boomers) fail at EVERY one of those items - they live paycheck-to-paycheck, no savings, lots of revolving debt. Ironically, even the Planners have low wealth & car & boat payments. The cookie cutter plans lead straight to mediocre outcomes, not to wealth - because those safety features are all expensive, either directly or as lost opportunity.

We cap our EF at about $5000, that's plenty of dead money for small typical issues. If we had a real emergency (6 months w/o work, major health failures) we would sell stock, maybe at a market low but that's part of the risk.
As for saving for short-term needs - houses DP, cars, etc - I use longterm funds (an SP500 fund) and sell some if needed. But almost always, I am able to borrow for shortterm needs and leave our own money compounding. Eg, I could sell stock to make a DP on a rental - but instead I would deal for a near-zero down - or refi another house to free up cash, etc.
EG, if you were to invest $25k of your EF plus your $5k house fund in an 11% fund and manage your way around shortterm needs, the $30k would be about $1.3M when you're 65. That money will be more important to your far-future than avoiding some minor interest costs.

Several times over my 40 yrs of landlording I refi'd our houses - eg, remove $50k of equity (pay $275/m for the loan), invest the $50k for 30 yrs @ 11% ($1.1M). The interest cost on the $50k for 30 yrs is about an extra $50,000 - ie, a small part of the $1.1M earnings..

As for putting up lots of safety blocks for 'falling on hard times', payment deferments, etc - the answer is to use your management skills to make sure those things don't happen. As opposed to prepaying for every "what-if" that you can imagine. Almost NONE of those problems will happen - pay only for the one that does.
Post Sat May 28, 2016 3:31 pm
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SCEngineer
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Hey plush,

I'm only a year older than you and still planning my second kid, but though you'd like to hear from someone closer to your situation.

Seeing how you already own 2 houses, and gratz on that bonus $350 in "passive" income, I'd really be looking at that last $45k in debt and making plans as to how soon I can get rid of it. You list your lifestlye costs at $3,200 per month. That means a 6 month EF would only be ~$20k. So you are already looking at being $13k over your needed EF.

Since you know a car is in your near future try to define what you're looking at. Do you need a car to get you to and from work, or is this your family vehicle to move the kids around? I can get a brand new Versa or Sentra (I like my reliable Japanese car for work) for anywhere from $15-25k, or I can be looking for something used for half that price. If you're going to beat 6.8% interest, finance as much as you can and beat the heck out of that student loan, following it up with the car.

From the looks of the income and lifestyle you should be looking at paying off about $1500-2000 in debt per month? that means the 48k should be done in about 2 years.


Oldguy is right from a pure numbers standpoint. But the more I read about finances, the more I realize people are emotional. The example to boot is last month my septic tank broke and I needed $3000 to get it fixed, Sure enough working baby step 2 I've only got $1000 on hand. So I pull from the vacation fund, my personal stock savings, and anywhere else. I got so worked up about moving the money around I actually caught a cold, still have a touch of a cough. Probably an overreaction considering I had the money available, but I'm human (and therefor emotional).


If you dont mind the debt, and from the way you're responding to oldguy I'm guessing you dont. You might wanna consider running a HELOC to pay down properties and save for your next property. The short theory is that you move all your checking and savings into the house payment and use the HELOC as a checking account. It's kinda complicated and I dont wanna write the whole thing out, instead here's a handy podcast.

https://www.listenmoneymatters.com/how-to-actually-save-thousands-on-your-mortgage/
Post Mon May 30, 2016 6:27 pm
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oldguy
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quote:
Oldguy is right from a pure numbers standpoint. But the more I read about finances, the more I realize people are emotional.


That's very true. There are two sides to the problem, the math -and the emotion. To become wealthy, you must solve both - in my case, as as an engineer, the math came first. It became apparent to me that conventional wisdom was mostly wrong, the more I studied it, the more it became apparent that MOST of it was wrong. Eg, never borrow, always pay cash, never invest borrowed money, don't 'short' the market, put 6 months cash in a EF account - and so on. After I solved the math questions to my satisfaction, the 'emotion' came easy, your own confidence in your calculations gives you to courage to make the deals - and to HOLD the deals thru major stock and real estate market fluctuations.

(During the Great Crash of 1987, I didn't blink, I still have those stocks. And when real estate crashed in the 1980s & in 2007, I kept all of the houses). But I doubt that, in real life, many people did that, most folks get scared out of the markets.

BTW, when I got my engineering degree, scientific calculators weren't yet invented, have you ever worked out a 30 year amortization schedule with a sliderule and a book of log tables? lol. Actually, I worked on the apollo lander in the 1960s, we put man on the moon using sliderules and log tables.
Post Mon May 30, 2016 11:24 pm
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plush
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SCEngineer - thanks for the post. In talking with Oldguy, I'm becoming less emotional about debt, so I mind it less. It would be great to have no debts tied directly to me (student loans) or my primary residence, but I am OK with it so long as my income and expenses are manageable and keeping that debt retains/improves my opportunity to invest in more rentals.

The HELOC concept sounds interesting, but I just couldn't make enough sense of it after reading the article. My equity position in my rental is about 25% thanks to the past two years of market improvement (I bought for 5% down and occupied it for 18 months). According to the article, I can go 90% LTV on a HELOC at present, which would provide access to about $40k. If I understand the concept correctly, I'd be taking my commission checks and throwing them at my mortgage. In exchange, I would be able to utilize the HELOC like a checking account for everyday expenses, paying our student loan payments, etc. This would convert my life to an interest-only payment system that would andshould theoretically reset each month as I bring new income in to pay it off. In strong months, the mortgage balance goes down and my HELOC funds access goes up. In lean or break-even months, I pay a little interest on balance rollovers or break-even with income to expenses before interest is calculated, sort of like using a very low interest credit card and paying the balance in full each month.

Here's my understanding of it in a flow chart:

185k loan balance / 65k equity / 40k accessible at 90% LTV
v
Deposit $10,000 commission check in HELOC (no balance so goes toward mortgage). Loan balance now $175k. HELOC accessibility now $50k
v
Write checks from HELOC for groceries, primary mortgage, student loan and car payment (if applicable). Whatever money I earn then pays the heloc balance with the excess rolling back onto the mortgage.

I've read the article a few times and I just don't see how that makes sense. If I pay down a 4.375% debt on an illiquid asset (my rental) and have a HELOC available for expenses, I'm essentially making a 4.375% gain by having a smaller mortgage loan balance, which accumulates less interest, but then I'm increasing HELOC debt proportionately (which will have about the same interest rate) when I spend out of that account. The HELOC payment would also fluctuate depending on expenses to commissions earned.

I suppose dropping tons of money on the mortgage for a short-term gain of 4.375% would be pretty cool, then using the HELOC to fund the down payment on a rental, but then I'd have two payments which would factor into my DTI and make it more difficult to qualify for that rental.

Am I missing something here? I just don't see the incentive at present.

Thanks!
Post Sun Jun 05, 2016 11:57 pm
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oldguy
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quote:
Am I missing something here? I just don't see the incentive at present.


That 'method' started out as the "Australian Method to Pay Your Mortgage Fast" about 15 or 20 yrs ago. It shows up occasionally as "What Your Bank Doesn't Want You To Know", "How to Save 1000s on Interest", and so on.
Post Mon Jun 06, 2016 5:30 am
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plush
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quote:
Originally posted by oldguy
quote:
Am I missing something here? I just don't see the incentive at present.


That 'method' started out as the "Australian Method to Pay Your Mortgage Fast" about 15 or 20 yrs ago. It shows up occasionally as "What Your Bank Doesn't Want You To Know", "How to Save 1000s on Interest", and so on.


Thanks, that's all I needed to know.

I'll pass.
Post Mon Jun 06, 2016 6:00 pm
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oldguy
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quote:
I'll pass.


Smile
Post Mon Jun 06, 2016 6:08 pm
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