Math Question

RJB1180 · #1 (**permalink**) 08-16-2006, 07:56 AM

I have the oppurtunity to take a Home Equity Loan @ 3.25% APR

I do not need the money right now, so conviencing my wife to take more debt is an up hill battle

20K
monthly payment per bank
$4.35/ k = $87 x 12 = 1044 per year

20k in online savings (ED)
Rate 5.02%/365 = 0.000138 x 20K = 2.75 x 30 =82.52 *12 = 990.25

APY 5.15%/365 = 0.000141 x 20K = 2.82 x 30 =84.66*12 = 1015.89

which is right.

Also do you think this is a wise move, I have between 100k to 150K in equity

sweeps · #2 (**permalink**) 08-16-2006, 09:10 AM

I'm not sure I understand the question. Are you wanting to take out a home equity loan and put the money into ED to earn the interest?

Your annual profit will roughly be: 20K * (E - H)
where E = your after-tax ED APY
and H = your HEL APR

After taxes, you're probably not going to make as much as you had hoped. Also are there any fees?

greedy4chips · #3 (**permalink**) 08-16-2006, 09:25 AM

Your ex. was to borrow $20k for 30 yrs at 3.25% which means you will pay back $31K+

So investing the $20k at 5% for 20 yrs with interest reinvested would give you $72k assuming a 15% tax bracket and a 6% state income tax rate.

Early on your loan will cost you more than it earns.

Now if you put $87 per month (Your monthly payment on this loan) into a 5% yielding acct for the next 30 yrs you will have $65k+ assuming you reinvest all interest earned.

So for the extra 7k you are going to earn in the next 30 yrs you have taken on 20K in debt.

Interest on 2nd mortgage is tax deductible, but not worth it, since it is offset by interest earned on your savings.

If that is worth it to you then do it.

IMHO I would just invest the $87 per month and be done with it.

RJB1180 · #4 (**permalink**) 08-16-2006, 12:27 PM

I was thinking of utilizing the money more of as an emergency fund than an investment
since the rate was good.

I was just trying to rationalize the cost of borrowing when not needed, as opposed to borrowing when needed.

And if rates start to decline again I can always pay it off.

greedy4chips · #5 (**permalink**) 08-16-2006, 01:05 PM

Well the only way I would consider that for myself would still be if I could make money in the meantime.

Basically, it seems you are buying emergency insurance by paying the difference in case an emergency happens.

Chris Rock said, "Insurance should be called In Case Sh*t Happens!"

sweeps · #6 (**permalink**) 08-16-2006, 01:24 PM

RJB, if you're looking for an emergency cash stash, why not do a 0% balance transfer. The rate will obviously be more favorable, and you don't have to put your house on the line.

disneysteve · #7 (**permalink**) 08-16-2006, 01:55 PM

Quote:

Originally Posted by RJB1180

I was thinking of utilizing the money more of as an emergency fund than an investment.

Here's the potential problem. What if you take out the loan and park the money in your account as an emergency fund and an emergency strikes, causing you to spend that money. How will you pay off the loan?

b4freedom · #8 (**permalink**) 08-16-2006, 05:33 PM

Quote:

Originally Posted by greedy4chips

Interest on 2nd mortgage is tax deductible, but not worth it, since it is offset by interest earned on your savings.

Actually, it's only tax deductible if you use it for something on your house. If you use it to buy a car, invest, etc., it's not tax deductible.

b4freedom · #9 (**permalink**) 08-16-2006, 05:34 PM

How did you get a Home Equity Loan @ 3.25% APR? Are you sure it's not a HELOC? 3.25 is really cheap right now. And it's really a HEL for 3.25%, I want one too.

RJB1180 · #10 (**permalink**) 08-17-2006, 05:27 AM

The loan is from Hudson City Saving Bank, it is for low/mod income, which is for NJ, so a lot of you will have sticker shock.

http://www.hcbk.com/site/consumer_nj_low.html

creditcardfree · #11 (**permalink**) 08-17-2006, 06:39 AM

Um, probably have to agree with your wife. You should SAVE for an emergency not BORROW for one. Last thing you would need in an emergency, such as a job layoff, is to be making additional payments on a loan. If you SAVE, the bank will pay you!

Best of luck!

b4freedom · #12 (**permalink**) 08-17-2006, 08:00 AM

Have you maxed out your tax favorable saving options (like an IRA)?

If you haven’t, I would max your tax favorable retirement accounts first.

Without looking at the tax brackets, etc. This is how the math works:

This is for the loan:
Amount Borrowed $20,000.00
Rate 3.25%
Term 360
Monthly Payment $ 87.04
Total Payments $31,334.85

This is if you invested the loan:
Amount Invested $20,000.00
Rate 5%
Length of Investment 360
Additional Payments 0
Future Value $89,354.89

This is if you invested the same amount of money as you'd normally pay back:
Amount Invested $ -
Rate 5%
Length of Investment 360
Additional Monthly Payments $ 87.04
Future Value $72,440.84

However, if you're using pre-tax dollars to invest and your in the 25% tax bracket, you'll get something like this:
($116.06 is what you'll have to earn if you pay 25% in taxes and then pay your mortgage.)
Amount Invested $-
Rate 5%
Length of Investment 360
Additional Monthly Payments $116.06
Future Value $96,587.79

Also, I'd look for something with a greater return then 5%. Ideally around 8%.

b4freedom · #13 (**permalink**) 08-17-2006, 08:01 AM

Quote:

Originally Posted by RJB1180

The loan is from Hudson City Saving Bank, it is for low/mod income, which is for NJ, so a lot of you will have sticker shock.

http://www.hcbk.com/site/consumer_nj_low.html

Thanks, I'm in Jersey. I know someone that could definitely use this.

RJB1180 · #14 (**permalink**) 08-17-2006, 08:36 AM

CCFREE: obviously this is the perfered way but that is not an option.

and before every jumps, svaings blah blah. medical bills etc, are the reason.

B4F: the rate is only good until Sept. 2, 2006. I also have a phamphlet with the rate and date, if there are problems

autoxer · #15 (**permalink**) 08-17-2006, 09:36 AM

Quote:

Originally Posted by RJB1180

and before every jumps, svaings blah blah. medical bills etc, are the reason.

Are you expecting the medical bills or do you just want the cash just in case?

creditcardfree · #16 (**permalink**) 08-17-2006, 09:37 AM

I think I understand your reply to mean that you are expecting medical bills for services to be rendered in the future. We've been paying medical bills too. So expensive. Is it possible to talk to doctor or hospital about payment plans they make? Would they charge interest? These might be questions I'd ask before I would put my home at risk with a home equity loan. Just my opinion.

BTW, The rate that you've been quoted is really good. Take care.

RJB1180 · #17 (**permalink**) 08-17-2006, 11:18 AM

My wife has stage 4 cancer, age 25, so yes I expect medical bills, 5K a pop every 3 months really doesn't let you save so much.

She is currently not working,"cant", and as such our income is solely my salary which I can't complain but

Also depending oin her condition I have to stay home, and you can guess I don't have any more sick/vac, which my job is also generous with.

That's the real reason, and I guess I don't feel $87/month is a real risk to my house.

b4freedom · #18 (**permalink**) 08-17-2006, 11:48 AM

I'm sorry to hear that about your wife. She will be in my prayers.

I think you should do it, I don't think you can beat that rate.

If you don't have an emergency fund, and you expect an emergency, and you know that it'll probably lead to debt, it's best to make sure that the cost of the debt can be minimized. I don't think you could minimize the debt, at 3.25%, any other way.

disneysteve · #19 (**permalink**) 08-17-2006, 11:59 AM

Quote:

Originally Posted by b4freedom

Actually, it's only tax deductible if you use it for something on your house. If you use it to buy a car, invest, etc., it's not tax deductible.

That isn't true. I took out a HEL and used it to pay for my car and pay off student loans and I get to deduct the interest.

creditcardfree · #20 (**permalink**) 08-17-2006, 11:59 AM

RBJ1180, I think because of your situation, it is not a bad idea to take out the loan. What is most important is to get your wife well and spend as much time together as possible. The debt can be paid later...by the sale of your house if it comes down to it. Loving each other and spending time together is probably some of the best medicine.

Thoughts and prayers are with both of you.