For a lot of you older piggs…Awhile back ago, someone posted this thread about software that magically is suppose to optimize your loan payments, and tell you when and how frequently you should pay your loan so as to pay the least total interest at the end…
One of the things that I was curious about was how a HELOC loan and a traditional mortgage loan differ wrto to how frequently the loan compounds, and how one could pay the loan differently. However, i never took out a HELOC to bother with it.
Well, I took one out at the beginning of the year to bridge loan one of my rentals, since the HELOC was only 3% with a upper cap not much higher.
Looking at the HELOC mortgage, a few things that I found interesting are:
1. There is required monthly payment of $910.26…
2. But you don’t need to pay the entire $910.26 balance off with one payment during at the end of the month.. You could, in theory, make daily payments if you wanted to.
3. If you make more frequent payments, each payment first pays off the accrued interest accrued so far for that month..Then, the remaining amount you paid reduces your principal balance.
So this got me thinking… Instead of making one $910.26 payment at the end of the month… How much exactly would I save if I split my payments into a daily payment…….Theoretically this can be done, since my credit union allows scheduling an automatic payment as frequently as I want.
Hypothetical scenario:
1. The remaining balance of the loan is $100k.
2. The periodic daily rate is 0.0082192% (3% APR)
3. Minimum monthly payment is $910.26
4. Consider 1 month = 30 days
Scenario 1: Pay the $910.26 at the end of the month
In this scenario,
* the total interest to be paid would be 30*0.000082192*100000==> $246.58 for that month
* total principal would be reduced by $910.26-246.50=663.69
* outstanding loan would be 99336.31
Scenario 2: Pay $30.30 each day ($910.26/30)
Using a 30 day amortization table with a 0.00821292% daily rate, at the end of 30 days
* you would still have made the same $910.26 monthly payment
* the total interest paid would be $245.78
* the principal would be reduced by $664.48
* the outstanding loan balance would be $93335.52
……………
So, by making daily payments instead of monthly payments, I would save a whopping $0.79 each month..
Over 15 years, that would be a whopping $142 in interest savings…
Realistically, it would go up a little from $.79/month, as your principal balance trickles down each day….albeit slowly
That said, I think I’ll stick to opening a Chase Bank Account and getting that $200 free money every 6 months 🙂
Great analysis flu! I had a chuckle while thinking what if you indeed saved a bunch of $$ making daily payments, then the bank would create a new ‘frequent depositor’ fee. har. .
[quote=harvey][quote]pay the least total interest at the end…[/quote]
To pay the least total interest, pay the loan off immediately.[/quote]
Why?
So I can take money out of a higher return after tax investment elsewhere just to pay off this rental property….and consequently needing to pay capital gains taxes on that sell transaction this year…
…Just so I can own that rental property free and clear, so that that my rental income ends up being really really positive this year… for which I end up having to pay income taxes on that now really positive cash flow on top of the capital gains taxes I also have to pay on the money that I need to use to pay off my rental property…
…In a year when my tax bill will end up being even larger this year versus last year due to a pretty good windfall from from my company issued stock for which I had to sell and from a W2 income that was slightly higher than last year…
..especially when with the extra income I will have, I’ll end up probably just investing it anyway rather than need/wanting to spend it?
Um, no thank you…. I’ll wait for a year when my AGI is lower, like when/if I take a sabbatical, whether it’s voluntary or forced on me 🙁
Yes, but selling $150k of an investment to pay off that loan completely in itself is subject to capital gains, depending on how much of that is a gain. That’s on top of whatever other things have already been sold…
I for one, don’t really want to keep pushing my AGI up this year, especially when some planning of when I sell what investments, I can more or less control what my AGI is by spreading it out over a longer period of time…. sort of…with the exception of company issued stock, bonus, etc… which usually has some sort of time window you want to do things within.
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