Debt consolidation calculators debt free calculator

This calculator will show you how much money you can save and how quickly you can be debt free using the “rollover” method. The “rollover” method of becoming debt free consists of putting all available funds toward one debt until it is paid off. After the first debt is paid, you put all available funds toward the second debt until it is paid off, and so on. The process continues until all of your debts are paid off.

The Debt Free Calculator will show you how powerful focused effort can be toward eliminating your debts. By focusing all your resources on one debt at a time, you can save enormous amounts of time and money and become debt free much faster than you would otherwise. Check out our article on the rollover method of debt reduction to learn about the inner workings of the Debt Free Calculator.

Debt Free Calculator Instructions

  1. Enter the balance, interest rate, and minimum payments of up to 10 separate debts in the fields provided. Do not fill in the columns labeled “Interest Cost” and “# Payments Remaining” as those will be calculated for you.
  2. Next, fill in the “Discretionary Income” field. Include in this field any extra money you have available per month, over and above your minimum payments, that you can pay toward your debts.
  3. Once you’ve filled in the balance, interest rate, minimum payment for your debts, and your discretionary income, press the Go! button to get your results.

How to Read Your Results

  • Your summary results are displayed in the bottom section of the form entitled, “Current Debt Plan Vs Accelerated Debt Plan.”
  • The first row labeled, Current Totals displays your summary results making minimum payments on your debts.
  • The second row labeled, Accel. Totals displays your summary results under the accelerated debt free plan. If you aren’t familiar with how the Accelerated Debt Free Plan works, check out this article for a brief tutorial.
  • Balance – This is the total amount of your debts and will be the same under both repayment plans.
  • Interest as % of Balance – represents the percentage of money borrowed that is paid in interest. For example, if your outstanding debts total $150,000 and, over the course of repayment, you pay $150,000 in interest, “Interest as % of Balance” would be 100% because the amount of interest you will pay is equal to the amount borrowed.
  • Monthly Payment – is the total of your monthly debt payments. The Accel. Totals monthly payment will be greater if you included discretionary income from Step 2 above.
  • Interest Cost – This is the total amount of interest you will pay over the life of your debts and most people think it’s surprisingly high, but trust us, it is 100% correct.
  • # Payments Remaining – This is the total number of payments, or months, you have left to pay on your debts.
  • The very last row, labeled, “Time and interest savings with accelerated debt payoff plan” shows you how much time and interest you will save by using the Accelerated Debt Payoff Plan as opposed to making minimum payments.

The Last Two Calculator Buttons

You’ll notice there are two more buttons at the bottom of the Debt Free Calculator labeled, “View Monthly Pymt Schedule,” and “View Yearly Pymt Schedule.” These two buttons will show you amortization schedules for the Accelerated Debt Payoff plan so you can see how your payments, balances, and interest costs are affected by the plan. The two buttons allow you to chose to view the amortizations schedules by month or by year.

Javascript Required

Last, but not least, you must have Javascript enabled on your web browser in order to properly utilize the Debt Free Calculator as it is. Don’t worry, the vast majority of internet users already have Javascript enabled, but if you find that the Debt Free Calculator isn’t quite working as expected, you’ll want to check your Javascript settings on your web browser. Here’s a quick how-to on how to check Javascript settings on most web browsers.…

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Debt free with debt rollover

The average American has over $8,0001 in credit card debt alone; add to that car payments, mortgages, and whatever else you can charge these days, and becoming debt free on the average American salary of around $48,0002 seems like an impossible task. Most Americans are looking at the possibility of never getting out of debt unless they do something different. So here’s a method you may or may not know anything about that can save the average American at least $75,000 and almost 8 years in debt payments.3

Debt Free with Debt Rollover

While you probably know more than a few people looking to pay off mountains of debt, you may also know more than a few people that never actually get out of debt, or really make any progress at all toward getting out of debt. We live in a society that is absolutely ruled by debt. According to the National Center of Education Statistics, 10 years after graduation, college-educated workers are still struggling with debt loads of 4.5% of their incomes. With all this in mind, whole that debt can create in your life can seem bottomless. Well, we’ve release our Debt Free Calculator to show you how you can put your debt into perspective and be debt free at least 30% faster than you originally thought; and that’s if you make just the minimum payments.

What Is Debt Rollover and How Does It Save Money?

Ok, so the real question is, how does it work? Well, its a simple strategy and its nothing new, but with our Debt Free Calculator, we hope you can see a light at the end of the tunnel. The key to the Debt Rollover Method is making a plan and sticking to it. Obviously no amount of planning can help if you don’t see it through to the end. That’s why our Debt Rollover calculator allows you to create an amortization schedule that will show you exactly where your money is going each month.

The method is simple. You make at least the minimum payments on all your debts until the first one is paid off. After that, you rollover the money you were paying no that first debt into the next debt to knock it out even faster. Once that’s paid off, you rollover the amount you were paying each month on the debts that are now paid off to the next debt, and so on. The effect is amazing and really snowballs, especially if you have a lot of debt. This is one method where, the more debt you have, the more benefit you’ll see.

An Example

Let’s say you’re an average American with $8,000 in credit card debt and an average loan amount of $222,700, and your monthly minimum credit card payments are $240 and your mortgage costs you another $1,403 per month. During the first stage you make those minimum payments until, in month 41, you pay off your credit card(s). At that point, you no longer have the minimum credit card payments of $240 per month, so, instead of spending an extra $240 per month on frivolities, you rollover that $240 per month into your next debt, in this case that would be your mortgage payment. Now, instead of making your minimum mortgage payment of $1,403 per month, you pay $1,403 + $240, or $1,643 per month. Using these numbers, and the debt rollover method, you’ll save almost 8 years and 30%. Now, throw in a little extra income toward those debts each month and you’re really going to see some incredible savings.

Are Extra Payments Required?

No, extra payments are not required for this method to save you, on average, 30%, but as anyone with a credit card knows, the more money you can pay each month the better off you’re going to be, so the Debt Free Calculator has the option of factoring in any extra money you have each month that you can put toward paying down your debts. It’s not required, but it certainly helps.…

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Mortgage glossary

This is a glossary of some of the more common, and most important mortgage terms. This list will help to familiarize you with some of the terms you should know to find the best mortgage program for your needs.

PITI – Principal, interest, taxes, insurance. The total monthly payment if fully amortized. PITI also used to calculate reserve requirements for asset documentation (i.e. Full doc loan may have reserve req’t of 2 months PITI – if PITI is $3,000, minimum liquid assets required to qualify is $6,000).

LTV – Loan to Value – Percentage of a homes value owed on a mortgage. (i.e. If loan amount is $200,000 and home is worth $400,000, LTV = 50%. LTV of 100% would mean the mortgage amount is equal to the value of the property). Most mortgages have an upper limit on the LTV. LTV generally refers to one loan, even if there are multiple liens on a property. For example, with a first mortgage amount of $200,000, a second mortgage amount of $100,000, and a property value of $600,000 – First mortgage LTV = 33%, Second mortgage LTV = 17%.

CLTV – Combined Loan to Value – This is the total percentage of a home’s value owed on all mortgages combined. For example, first mortgage amount of $200,000, second mortgage amount of $100,000, and property value of $600,000 is 50% CLTV. If applying for more than one mortgage, there will be an upper CLTV limit on the combined loan amounts as well as an upper LTV limit on each individual loan amount.

DTI – Debt to Income Ratio – Represented as a percentage, this is the ratio between debts and income. There are two types of DTI:

  1. Front End DTI (Also called “upper” or “top” DTI) – This is the ratio between monthly housing expenses and monthly gross income. Formula for Front-End DTI is: PITI / Gross Monthly Income
  2. Back End DTI (Also called “lower” or “bottom” DTI) – This is the ratio between total monthly fixed expenses and monthly gross income. Formula for Back-End DTI is: (PITI + Non-housing-related Fixed Expenses) / Gross Monthly Income.

As a rule of thumb, its important to note that any expense appearing on a credit report will be factored into DTI calculations and any expense not appearing on a credit report will not be factored into DTI calculations. For instance, most utility bills do not show up on credit reports, and, as such, are not factored into DTI calculations.Upper limits on DTI generally fall around 35/50, or 35% max front-end DTI and 50% max back-end DTI. In other words, no more than 35% of gross income can go to fixed housing expenses each month, and no more than 50% of gross income can go toward all fixed expenses (housing included) each month.

VOE – Verification of Employment – This is a document completed by the borrower’s employer and submitted to the lender for the purposes of confirming employment history if required, and income, if required, as shown on the 1003.

1003 – Uniform Residential Loan Application – Pronounced Ten – oh – three. Four-page Mortgage application.

ARM – Adjustable Rate Mortgage – Any mortgage with an adjustable rate feature. Note: This includes any mortgage with a rate that may adjust at any time during the loan period. For example, a traditional 30-year fixed rate mortgage is not an ARM, however, a 5 year fixed is, because after the first five years, the rate begins to adjust for the remaining term of the loan.

Amortization – The characteristic of a loan that describes whether or not it will pay off and, if so, in how long. For example, 30 year amortization means the loan will reach a zero balance after 30 years (360 months). 10 year amortization means the loan will reach a zero balance after 10 years (120 months).

Negative Amortization – The characteristic describing a loan with a principal balance that increases over time. Generally, this type of loan involves a payment less than the actual amount of interest due. The difference between interest paid and interest due is added to the principal balance each month, resulting in negative amortization. A negatively amortized loan will never reach a zero-balance. Note that there is always a limit to the amount of negative amortization that can occur before the borrower is forced to refinance, make interest only payments, or make principal and interest payments.

Doc Type (see Doc Type articles) – Describes the level of documentation required to be provided to the lender as a qualification requirement for a given loan.

Interest-Only – A type of amortization in which the principal balance of the loan neither increases nor decreases. Each month, the payment is equal to the interest owed and no principal payment is made. With interest-only amortization, the principal balance on the loan will never change. Note that there is a limit on the interest only period. When such limit is reached, the borrower will have to refinance or make principal and interest payments.

Impounds – Also known as “escrows,” this is, usually, an optional loan feature that allows the borrower to opt to pay property taxes and insurance monthly, included in the mortage payment. The money that is paid is held in an escrow account until property taxes or homeowner’s insurance is due, at which time the money is paid out. Usually, if the borrower opts for impounds, the interest rate will be reduced about 1/8%. See Impound article for more information.

SIVA – Stated Income Verified Assets
SISA – Stated Income Stated Assets
NINA – No Income, No Assets

Underwriting – A stage in the loan approval process during which a bank or lender representative reviews all loan documents and makes a decision to approve the loan, decline it, or approve the loan subject to certain conditions.

Conditions / Conditional Approval – Common in brokered mortgage transactions, a conditional approval is issued when the underwriter feels fit to issue an approval, subject to …

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Mortgage Doc types

If you have a mortgage or have ever tried to qualify for one, you’re probably familiar with the term “Full Doc,” short for Full Documentation. That term refers to the level of income and asset documentation provided to the lender for a loan qualification. In the industry we call these Doc Types(the “Doc” stands for documentation), and there are quite a few of them, but the most popular and widely used are Full Doc and Stated. In this article you’ll learn the difference between Full Doc and Stated Loans as well as the other loan doc types.

When I price out a loan scenario with my lenders, they always ask, “What’s the doc type?” The answer to that question will be a factor in determining the borrower’s interest rate on a particular loan. The doc type refers to the method by which we verify, or document, the borrower’s income and assets for the purpose of a loan qualification/approval. The different doc types vary in their levels of risk to the lender and, as such, usually lead to different interest rates for any given loan program.

Important Terms

You didn’t think vocabulary class was over after grade school, did you? These are some terms we’re going to have to understand in order to follow along.


This is a document sent (usually faxed) to a borrower’s current employer, which he or she will fill out and return to the lender for the purpose of confirming that the borrower has been employed there for at least two years. It may not be necessary for the employer to confirm length of employment under certain doc types.


Also known as liquid reserves, this refers to the amount of the borrower’s assets that are considered liquid by the lender. This includes, but is not limited to: checking, savings, stocks, 401(k), IRA, or money market account. Generally, cash reserves will include anything you are able to access within a week or so if need be, even if there is a penalty for early withdrawal, such as with a 401(k).

For the purpose of qualifying for a loan, cash reserves are considered in months and are calculated based on the combined payments of loan principal, interest, property taxes, and homeowner’s insurance for the new loan.So, if a borrower has $20,000 in a 401(k), and, under the new loan, principal, interest, taxes and insurance payments total $3,500 per month, take $20,000 divided by $3,500 and you find that borrower has 5.7 months of cash reserves.


Most lenders have a requirement that the cash reserves/assets have at least two months seasoning, or two months in the same account.


Acronym for Principal, Interest, Taxes, and Insurance. This is the combined monthly payment that a lender will consider housing expenses. Incidentally, for the purpose of loan qualification, PITI under the new loan is what’s important, not the current loan. Also, if the new loan will be interest-only, PITI is replaced with ITI (Interest, Taxes, and Insurance) for most qualification requirements.

Full Doc

A full doc loan, also known as going full doc, or full documentation, is a loan that requires two years worth of income verification as well as seasoned assets. We’ll get into seasoned assets in a bit, for now lets focus on income documentation. Thinking of it as a full doc loan is slightly misleading; it’s better to think of the doc types in terms of pricing, as I can usually do any given loan program on a variety of doc types. So, instead of a full doc loan, think of it as full doc pricing.

Most lenders require two years worth of income documentation in the same field, preferably at the same job. This is usually in the form of the past two years’ tax returns (W2s), the past two months’ pay stubs, and a VOE (see terms above). If a borrower has not been employed with the current company for at least two years, but can document two years of employment in the current field, the lender will usually accept that. So, if a borrower has been an administrative assistant at his or her current company for only a year, but was also an administrative assistant at another company prior to the current one, that borrower should be fine.

As far as assets go, the lender will usually want to see the most recent two periods’ bank statements confirming 6 months worth of cash reserves. I mentioned the term seasoned assets above, which means the assets must have been sitting in the same account for at least two months; this is why you shouldn’t transfer money around when you’re about to refinance or purchase a home.

Stated Doc

This is usually referred to as going stated, or simply, stated. There are several types of stated loans, but the most common two are Stated Income/Stated Assets (SISA), and Stated Income/Verified Assets (SIVA). If you’ve ever heard the term “Liar Loans,” stated loans are what that term refers to due to the fact that stated income means just that, stated, and people get away with stating just about any income they want that will allow the borrower to qualify for the loan, as long as it’s within reason (i.e. Stating a $10,000 per month income for a waiter just won’t fly). It is illegal to overstate income, but these types of loans have been so popular in the past because it’s nearly impossible to enforce that.


requires that the income and assets be stated on the loan application, but they are not verified in any way. Two years of employment in the same field, however, is verified with a VOE, the only difference is the employer is not required to note income on the VOE.


requires that the income be stated on the loan application, but the assets are verified just the same as full doc, and …

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What is YSP

Recent News On HR3915 To Outlaw YSP, Among Other Things

If you follow the mortgage or real estate markets at all you’ve probably heard about HR3915, the new proposition to, among other things, outlaw Yield Spread Premium (YSP) in mortgage transactions. If you haven’t heard about it, just do a Google search on HR3915 and you’ll find quite a bit about it. If you want to read the actual resolution itself, you can find it here…HR3915. So let’s break down yield spread premium and whether it’s a good or bad thing.

Yield Spread Premium, What Is It?

YSP, or Yield Spread Premium, is a term familiar to mortgage brokers and those home-owner’s who’ve done business with a mortgage broker. Essentially, YSP is a premium paid by the bank as a result of the broker/borrower accepting a higher interest rate than “par.” If you don’t know what I mean by “Par,” you can read a bit about the interaction between points and rate in this post, but I’ll give you a brief refresher here.

Interest Rate – Loan Cost Interaction Refresher

When I shop for a loan for a client, the bank gives me options as to how I want the loan priced. Aside from all the traditional factors affecting interest rates and loan costs, the bank gives me, and hence my client, two numbers that we can play with to change the interest rate and closing costs of the loan. Those two numbers are points and interest rate, and they vary inversely, in other words, when one goes up, the other comes down.

If I have a client who wants the absolute lowest interest rate offered by a given bank, also called the “floor,” the bank will accept money up front to essentially allow the borrower to buy the rate down; the money the bank accepts is referred to as points because the cost to buy down the interest rate is represented by a percentage of the total loan amount.

So, that’s what’s known as paying points, the opposite is known as a rebate; also called Yield Spread Premium, or YSP. Let’s say my client doesn’t want to pay any closing costs at all; without YSP, that’s impossible. There are costs associated with a mortgage transaction that no amount of wishing and hoping will make disappear; there are several people that work on any given mortgage transaction, and all those people get paid through the profits on the loan. However, YSP allows me to set up a situation for my client in which he or she won’t have to pay any closing costs, or so it appears, let me explain.

Generally, on any given mortgage transaction, a homeowner can expect to pay $3500 or so in total closing costs; the money will be paid, and it willcome out of the homeowner’s pocket, there’s just no way around it. There are certain situations, however, in which a homeowner would benefit from not paying any up front costs for a mortgage. Yield Spread Premium allows us to accomplish that; in exchange for a slightly higher interest rate, the bank will pay a rebate on the mortgage transaction; the amount of the rebate depends on the amount of the rate increase. If my client wants no out-of-pocket closing costs, we increase the rate slightly, receive a rebate, and the rebate pays for the borrower’s closing costs as well as compensation to those who worked on the loan.

I mentioned “par” earlier; the par rate is the rate at which the borrower qualifies without paying any points and without receiving any rebate. If we want to pay points, we can get a rate below the par rate, and if we want to receive a rebate, or YSP, we get a rate above par. It’s important to keep in mind that the par rate is not going to give the borrower a no-closing costs loan, the borrower still has third party fees and broker fees to pay.

How Yield Spread Premium Affects Homeowners

Now that we’ve had our interest rate/loan cost interaction refresher, we can understand how YSP affects you, the homeowner. Let’s start with the good side of YSP – when it’s used responsibly by the broker.

When YSP Is Used Responsibly

Let’s say I have a client named Joe who plans to move in a year, but his mortgage rate is about to adjust and he doesn’t want to get smacked with ever-increasing payments. I’d usually recommend to Joe that he not pay any points, and, in fact, no out of pocket costs at all, and, instead, accept a slightly higher interest rate, and here’s why.

Let’s say Joe’s third party closing costs (Title, Escrow, Recording, etc fees) are $3,500. Let’s also assume that Joe has great credit and qualifies for a 6% interest rate at par (no points, no rebate). To close that mortgage transaction, Joe is going to have to pony up the $3,500 either out of pocket, or it will be rolled into the loan amount, in addition to my compensation. Now, let’s also assume that if Joe was willing to accept a 6.5% interest rate, the bank would pay a rebate of 0.875% of the loan amount(this rebate is YSP). If Joe’s loan amount is $600,000, that 0.875% rebate would amount to $5,250, which, in Joe’s case, may be enough to cover all of his $3,500 in third-party fees as well as my fee. So, Joe gets a no closing cost loan, but was it worth it to take a higher interest rate? Since Joe plans to move in a year, it probably was; let’s take a look.

Was Joe Better Off With No Closing Costs And A Higher Interest Rate?

That extra 0.5% on the rate will end up costing Joe $250 a month, which, over the course of the next year will add up to $3,000. But remember, the bank paid us a rebate of $5,250 (again, this …

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Mortgage real estate

Welcome to the 3rd (is it the third? oh hell, I’m not even sure) edition of the Mortgage and Real Estate Monday Link Up. We’re running a bit late today posting this as I usually get this up either late Sunday or early Monday, but I’ve been pretty busy this weekend, so I put some things on hold. Anyway, thanks to all the people who submitted their articles for inclusion; unfortunately I had to remove a few because they were too spammy. Listen, if you submitted an article and it didn’t show up here, review your site and make it look less spammy; I’m not even all that stringent in my enforcement of this, but when I go to a blog and I have to scroll down past a bunch of ads before I even see the article itself, you’re getting removed and you won’t be able to submit any more articles here. To those who provided valuable content, thank you very much, your articles were all very interesting and I hope my readers enjoy them as much as I did. Happy Monday!

Update: Unfortunately, due to the shady activities of certain website owners, I had to remove quite a few articles submitted here. I’ll be writing a TOS for future articles. I don’t like to take a hard-line stance on what I approve and what I don’t, I want everyone to have their chance to share what they’ve written, but now, due to the unfortunate attempts at wasting my time of a certain few, now-blacklisted, individuals, if you submit an article here and it even smells for a second like it’s a spam blog, or scraped content,  or the blog is “made for adsense,” you will be blacklisted and your article removed.

Money and Finances

Tracy Coenen presents Flip This House lawsuit update posted at FRAUDfiles.

Mortgage Market

Brandon L. presents Did you know this about FHA Loans? posted at FHA Mortgage Center Blog, saying, “FHA loans are a great deal. Learn about why they can save you a ton of money and make buying a home much easier.”


Gavin R. Putland presents Australia, Hong Kong, Singapore & Taiwan: How property taxes affect economic growth posted at Gavonomics.

Larry Russell presents Diversify To Avoid Investment Fraud posted at THE SKILLED INVESTOR Blog, saying, “Stories about investment fraud often seem to include the phrase “his or her life savings.” There should never be a moment during your lifetime when your life savings are not heavily diversified across many investment vehicles and firms.”

Personal Stories

Millionaire Mommy Next Door presents Can Renting Play A Part In The American Dream? posted at Millionaire Mommy Next Door, saying, “I calculated that our net worth could increase significantly if we sold our home, rented an apartment and invested the equity that was, at the time, tied up in the sticks and bricks over our heads. My husband and I fancy our debt-free life. Here are some of the other benefits our lifestyle as renters offers our family.”

Real Estate Market

Karyn presents Consider Buying Your Own Vacation Home posted at All About Orlando, saying, “Florida remains one of the best places to invest in real estate. The year round vacation season and minimal investment required make it the perfect place to purchase a vacation home.”

The Baglady presents San Mateo Home Sellers in Trouble #4 — 10/8/2007 to 10/21/2007 posted at xynny.

Tips & Tricks

Joshua Dorkin presents A Primer on Escrowed Funds posted at Real Estate Investing For Real.…

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Is real estate a good investment

Investments can be analyzed based on 3 main criteria: liquidity, safety, and rate of return. Most investments won’t rank high in all three, instead, there’s some give and take. Investments high in rate of return are usually low in safety, highly liquid investments tend to be less safe, and extremely safe investments tend to be relatively illiquid and have lower rates of return.

Real Estate is no different, however, it has a reputation of being the ultimate investment, so let’s break that down.

One quick note, the economy’s tough, so if you’re looking to invest in real estate with no or bad credit, check this out. You might also want to think about rent-to-own programs, which you can learn about here.

Is Real Estate a Liquid Investment?

Real Estate is one of the most illiquid investments you can make. This shouldn’t come as a surprise to anyone who’s bought, sold, financed, or refinanced a home. It can take weeks or months to be approved for a mortgage or to close a sale or purchase transaction, and the mountain of paperwork that goes into it is no fun for anyone.

Is Real Estate a Safe Investment?

A safe investment is one in which the likelihood of losing your money is low, the less likely you are to lose your money in an investment, the safer it is. So, is Real Estate safe? That depends on who you ask; I’m sure the millions of homeowners going through foreclosure right now because of the market crunch wouldn’t think so. The fact is, however, that no matter who you are, and contrary to popular opinion (which is changing pretty fast), Real Estate does not always appreciate.

The safety of real estate is very much tied up in its lack of liquidity as so many homeowners are finding out right now. Fortunately, if you take the proper precautions and keep in mind that real estate values do not always go up, you can protect yourself from much of the risk involved.

Does Real Estate Have A Good Rate of Return?

Did you ever play that rumor game in grade school where the class gets in a circle and one kid whispers something to another kid and so on, and by the time the “rumor” gets back to the original kid it’s completely different from when it started? That’s a lot like how real estate has gotten the reputation it has; some people have made quite a bit of easy money in real estate during market booms and so began the “rumor” that real estate is the ultimate investment. Boatloads of people invest in Real Estate because they think it has a high rate of return, but the truth may surprise you. In spite of the fact that Real Estate prices shot through the roof over the past several years, you might be surprised to know that taking a step back in time reveals a very different picture.

According to this chart taken from, the S&P 500 has stomped the performance of US home prices over a 20-year period. Since 1980, home prices have increased 247%, whereas the S&P 500 shot up over 1,000%, a staggering comparison.

So, Real Estate scores low on 2 of our 3 criteria, and the third criterion, Safety, is arguable. Maybe we should be rethinking that common belief that it’s impossible to lose in real estate. Sure, when approached correctly, real estate can be an incredible investment, but it can’t be approached haphazardly. It’s an investment like any other, and it carries risks and rewards, just be careful before jumping into real estate investing without a plan, because it may turn out that it’s not all it’s cracked up to be.…

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Pay Points refinance

A while back I wrote an article about paying points to refinance and why, even though we tend to hate the idea of upfront costs, it can be a huge benefit in the long run. In that article I said that you’d benefit from paying points upfront “when the cost of the buy-down pays for itself before you refinance again.” That’s good advice, but a lot more people will actually benefit from paying points up front, so here’s a slightly more advanced take on the subject.

To make things simple, I’ll use the mortgage rates and loan amount from the post about paying points to refinance. In that particular situation, paying $9,600 in points upfront on a $600,000 loan would save the borrower $300 a month on his or her monthly payment. As a result, the buy-down cost of $9,600 would pay for itself in a little less than 6 years; so, the cost would be worth it if the homeowner expected to remain in the home for more than 6 years. That’s just one side of the story, there’s another side that most people don’t think about.

Put the Savings Toward the Loan

Ok, so if you don’t pay the points, you’re payment is $300/month more than it will be if you do pay the points, so, if it’s up in the air and you can afford to make the higher payment, you should factor in one more thing. Since you were considering the higher payment anyway, what if you were to pay the points and put the $300 savings toward an extra principal payment each month? Well, at the end of the 6 years, the roughly $20k cost will be returned, but what if you then decide to stay in the home until the loan is paid off? At the end of 30 years, you’ll have saved $135,911 in interest payments and you’ll pay off your home 8 months faster!

In Layman’s Terms

So basically, it boils down to this: In this particular situation, if you’re going to stay in the home for at least 6 years, it will benefit you to buy down the rate, but every month you stay in the home past 6 years, you’re going to see extra savings that you wouldn’t have seen had you not paid points for the lower rate.

The Investment Approach

The other option is to pay the points, buy down the rate, save $300 a month and, instead of putting that money back into the loan, you invest the savings. At a measly 4% return, $300 a month will turn into $24,746 after 6 years, $44,619 after 10 years, and a whopping $209,188 after 30 years. You shouldn’t have any problem finding an investment that will pay a 4%.

Now, more realistic returns on, say, the stock market would be around 8-12% – let’s call it 10% for the sake of the demonstration. Investing $300 a month for 6 years at 10% would give you $29,965, after 10 years you’re looking at $62,232, and after 30 years that little ‘ole $300 a month turns into $683,381!

Obviously the investment approach yields the greater benefit and, in fact, the roughly $20k cost of the loan we covered earlier would pay for itself a bit sooner than 6 years using this approach.

It’s All in the Numbers

In California, a $600,000 loan is quite common; ultimately, how the numbers work out will completely depend on your situation and these calculations need to be made by you, your financial advisor, or your mortgage advisor. Whoever does the math, it needs to be done, we’re talking about a lot of money here. So quit sitting on your butt and get to it!…

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Pay off mortgage lose tax deduction

Irvine Mortgage – I was working with a client a while back who brought up a question that a lot of people ask me and it’s one of the most common questions I get asked. This particular client was interested in paying off his home early and wanted to go over some of the ways that he could do that. Toward the end of the conversation he asked, “But if I pay off my home, won’t I lose my tax deduction?”

The home ownership tax deduction is the biggest and one of the few remaining tax deductions for the middle class American, so it’s not something that’s easy to let go of, but there’s an incredibly simple answer to that question.

If I told you that if you give me a dollar, I’ll give you 33 cents back, would you go for that? If so, give me a call, I’m sure we can work something out ;-). All kidding aside, that’s what the home-ownership tax deduction amounts to.

Let’s say you have $85,000 a year in taxable income; if you’re single that puts you in the 28% tax bracket (see chart).

Marginal Tax Rate[Taxable Income] SingleMarried Filing Jointly
35%> $349,700> $349,700

Let’s also say the interest payments on your home are $2,500 a month, $30,000 a year. Since your mortgage interest is tax deductible, you can write off all $30,000, which will give you an $8,400 tax refund.

Now, what if you pay off your home? You don’t get the $8,400 tax deduction, but you also don’t pay the $30,000 in interest in the first place. So, why pay $30,000 to get an $8,400 refund in April?

There Are Benefits to Not Paying Off Your Home

Don’t get me wrong, I’m not always in favor of paying off your home, in most cases it needs to be a personal choice you make after you’ve looked at all the options. The tax break can be used to your advantage with arbitrage, which basically means you’re borrowing money to invest and earning more on the investment than you’re paying on the loan. For example, if you pay $30,000 a year in interest, that’s equivalent to 6% on a $500,000 loan. If you receive an $8,400 tax refund, your effective interest rate on that loan is only 4.3%, not 6%; so if you can find an investment that pays more than 4.3%, you’ll be better off not paying off your home.

It’s a great strategy to use, but it’s not quite as simple as it sounds. If you want to know more, get in touch with me and we can see if this is a strategy that may benefit you.

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How fed funds rate drop affects you

The Fed decided to lower its target for the Fed Funds rate by 50 basis points on Tuesday, the Dow Jones rallied immediately, posting the largest one day gains it’s seen since 2003. So what does all this mean for you?

Well, the Fed Funds rate doesn’t directly affect mortgage rates, but mortgage rates are down since last week, so let’s examine exactly what happened, and why it may or may not last.

In simple terms, mortgage rates dropped because investors were pleased at the Fed’s decision to lower the Fed Funds rate, when investors are happy and confident in the US Economy, mortgage rates will generally go down, and that’s exactly what happened on Tuesday.

On the other hand, low interest rates can lead to inflation if the Fed doesn’t remain vigilant. The Fed Funds rate is only a target interest rate; in other words, the Fed doesn’t just come out of its meeting and say, “Let the Fed Funds rate be 4.75%,” and it just happens. The Federal Funds Rate is the rate at which banks lend money to each other, usually overnight, in order to ensure each is meeting the cash reserves it’s required to maintain. If one bank has more than it needs, it lends money to a bank that doesn’t have enough; the rate these banks charge each other is called the Federal Funds Rate. To drive the Fed Funds rate down, the Federal Reserve, in a roundabout way, pumps cash into the banking system. If banks have more cash, there is less demand for interbank borrowing, which leads to a drop in the Fed Funds rate.

Ideally, the cash the Fed pumps into the banking system will be just enough to keep the economy balanced. If the Fed pumps too much money in, banks find themselves with a bit of a surplus, which finds its way into the pockets of you and me. If everyone has more money, they spend more, which means higher demand for products and services, which leads to higher prices for products and services, which is called inflation. So the Federal Reserve has a real balancing act to play in the US economy.

If inflation starts to increase, mortgage rates will rise again simply because investors will demand a higher rate of return to counter inflation. So, while the Interest rate drop will spur the economy in the short term, what happens in the long term is anyone’s guess.

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