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Old November 29th 03, 11:14 PM
N2EY
 
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In article , "Ryan, KC8PMX"
writes:

But in regards to the math..... compare a 10,000 dollar mortgage versus the
10,000 car loan with applicable rates.


That's the point explained below. In some cases, it may make more financial
sense to pay cash for the car and have a bigger mortgage.

Nowhere did I say that one should
use refinancing money to pay off other debts.


Sure - but it's often a better deal to do just that.

The other debts themselves to
be paid off quicker if at a higher interest rate is what I said, even if I
didn't make that painfully clear.


The point I'm making is that you have to actually do the numbers to get the
clear picture.

In fact it often makes a lot of sense to consolidate high interest indebtedness
into a mortgage (first or second). Here's an example:

Suppose someone has gotten themselves into the following situation:

Mortgage: 6.5%, $100,000 unpaid principal, 25 years left on a 30 year loan.
Monthly P&I payment: $675.21

Credit cards: 15%, $25,000 total. 4 year payoff requires monthly payment of
$658.35

Car loan: 7%, $10,000 unpaid principal, 4 year payoff requires monthly payment
of $239.46

(note - the above is not an exaggeration - some people are in worse holes than
this!)

Left alone, the person will have to pay $1573.02 per month for the next four
years to pay off the car and credit cards, then they'll be on the hook for
$675.21 per month for the following 21 years to pay off the house. Total
payments of $245657.88 over the next quarter century, with $75,504.96 due in
the next 48 months.

Calculation of deductible vs. nondeductible interest is left as an exercise for
the reader.

Now suppose the person can get a 15 year refi at 5%. And suppose they refi the
whole mess, paying off the high interest nonmortgage loans immediately. Total
mortgage of $135,000. Monthly payment of $1067.57 for the next 15 years. Total
payments of $192,162.60 over the next 15 years.

That means an immeidate reduction in monthly payments of over $500, total
payout reduced by over $53,000 and total ownership of the house 10 years
earlier.

Again, calculation of deductible vs. nondeductible interest is left as an
exercise for the reader.

Now some folks might say that it's not a good idea to fold short-term items
like cars and credit cards into longterm stuff like mortgages. OK, fine - then
watch this:

Suppose we get a new 25 year mortgage of $100,000 at 5.5%. Monthly payment is
$567.79 That saves over $100 per month right off.

And suppose we also get a 15 year mortgage/consolidation loan for $35,000 at
5.5%. Monthly payment $285.98. But we pay off this loan at the rate of $813.98
per month - which will result in it being paid off in four years.

Under this plan, total monthly payment is $1381.77 - a monthly saving of almost
$200 per month and a long-term monthly saving of over $100 per month. And *all*
of the interest is tax deductible.

Of course the *best* deal is not to get into such a hole in the first place.
And the people who do dig themselves such holes will often have a hard time
being financially disciplined enough to pay off their loans ahead of time
rather than spending the difference.

And people say math is boring....

73 de Jim, N2EY