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Thank you! The other consideration I came up with was possibly picking my parents' state, as they could deduct up to like $10k a year from their state income tax return above the line. Seems like a good way to transfer some wealth down with fewer tax consequences regardless.
I am curious, where are you hearing home values dropping? That is certainly not something I am seeing beyond normal market fluctuation and seasonality.
ICOn was touting how homes have been decreasing
The amortization schedule (what you are referring to) is not fleecing. It is simply math. If you want to have more go towards principal, then you can do that on any mortgage. You are the consumer have the choice of what you want to do. For most Americans, the ability to buy more home is worth the interest cost over 30 years. For others, that may not see it that way and can opt for a 15 or 10 or honestly, I have options even shorter than that. If you select a 30 year mortgage and pay the minimum amount due then it will take 30 years to pay off. The first payment will have most of the payment going to interest while the last payment will have almost all of it going to principal.
Interesting. Thank you for the response.
The bolded is not true and was the point of my post. Putting more money down right away has the effect of lowering the monthly payment but it still produces an amortization schedule which is heavily titled towards paying interest in the first years of the loan. My point is that one would be better off (to reduce interest cost over the life of the loan) to put less down and instead make a massive one-time payment towards principal in month number one. That, by far, yields the lowest total amount of interest paid and it shortens the life of the loan.
I did that and I posted the data in an earlier post. Where is the flaw in my data or the conclusion? When it comes to reducing total interest paid, money down loses to a lump sum payment in month one. Please show my error if there is one.
Did you adjust for a difference in rate/cost?
I know little about paying for college and I think there is another thread dedicated to that, so you may want to check it out. My daughter is turning 9 soon so I'm still a decade away. Nonetheless, when I played around with the SAI calculator, it appears that there are a few key factors. One are assets for the kid, second are assets for you, and the third is your annual income. I doubt you want to start earning less income just to get a bump on financial aid. But you could attempt to hide some assets. For instance, money in a Roth is not factored into the calculation so cash in a brokerage account could be moved to a Roth. Or you could throw that money at the mortgage of your primary residence. Again, you probably don't want to do something extreme just to lower his the SAI.
Why would you be screwed if you have $50k now, 4-8 years out?
I see all of this as true.
Where do you think the savings is coming from in your scenario? The factors are dollar amount, time, and interest rate. Interest rate is constant. You are just trying to play with term. You can set the term up front instead of trying to jack with it with some delayed down payment. Instead of doing a 15 year loan and then paying down a payment to only have 10 years left, start with a 10 year loan.
The savings comes from the amortization schedule. While the interest rate is constant, the proportions at which you pay back interest versus principal is not constant. For the first few years of a loan, most of your monthly payment goes towards interest, netting you less equity in the house per month. You're mainly paying the lender and they are the ones getting the benefit of compounding. I used the term "fleeced" earlier and I stick by that term. Lenders have always front-loaded the payback so that the borrower does not get much equity early in the loan, thereby increasing the total amount of interest paid even when the rate is constant. So I asked myself a question: How do you get to the meat of an amortization schedule where your monthly payment goes equally to interest and principal? It takes a long time: about 15 years for a conventional 30-year mortgage and about 5 years for a 15-year mortgage. No thanks. I'd rather pay less down, make a one-time principal payment in month one, and get deep into the amortization schedule right off the bat. It's not more debt, it is less. I'm suggesting ways to deploy the money you have in a more efficient way.
I will pay more interest if I make an additional lump sum payment rather than put the money down at the beginning of the loan, if i make the same payment on both loans. There is no magic in an amortization schedule.
Your first statement is true, thanks for that. I was NOT keeping the monthly payment the same in my example.
This is the crux of our disagreement. A mortgage is not amortized differently than a car loan or a personal loan.
There is no “front loading” in an amortization schedule. You simply pay interest on the outstanding principal balance. Your principal balance at the onset of a loan is highest, hence, more of your payment is applied to paying the lender their interest first, then the balance gets applied to principal. That’s not getting “fleeced,” that’s paying the lender the agreed upon interest rate. Here’s an easy example. If you borrow $200,000 on a 30 year 6% loan, your monthly payment would be $1,199.10. You are getting “fleeced” to the tune of $1,000 of interest on the first months payment, and the reason why is simple:
Exactly. If your goal is to cut your loan to be a 25-year mortgage instead of a 30, all you've done is get more or less the same loan as just putting more down and doing a 25-year loan to begin with.
Thanks, I had never extended a personal or car loan to the length of what a mortgage typically is. I see now that they're equivalent.
And you might get a (slightly) better rate on a 15, 20, 25 year than on a 30 year.
Exactly. It makes no difference in terms of the baseline principal amount that you are paying interest on. It does, however, make a difference in that you’re likely locked into a larger minimum monthly payment and by default, shorter loan duration if you have a 250K loan that you make a 50K principal payment against in month 1.
3 years out, no?
You're talking just the tuition right; not room and board? When I think of the cost of college, I don't separate the two but that's certainly an option if money is tight or your kid is frugal beyond his years (one can only dream).
Boooooooooo. Tell him some iFriend you know had his parents (and the five preceding generations) go to Illinois, he went to OU, and it all worked out just great.
We have two in college, both live at home, their choice. But I wasn’t going to pay their room and board, just tuition. They knew this and decided accordingly. Money for any one of them wouldn’t be super tight, but with 5 kids I don’t want to pay a million.
3-7 years then, misread the “just finished” 9th grade part. Don’t forget he’ll need money his senior year if you’re agreeing to pay.
The last week or so has been a downward trend. Expectations is that will continue based on data coming out that drives rates.
This is definitely a personal preference thing. If someone has free cash flow to be safe doing this kind of thing then it's a good deal. If someone does not have a suitable stash of cash then they are at risk if a sudden life event happens (and lets face it, most of those are expensive). Getting a 30 year, putting money away in a house fund, then paying it all off down the line is another reasonable way to go about it.
Except that one in Tuscaloosa. Obviously.
Obviously
I'm trying desperately to keep my 2.75% with 15 years left on the note, but finding landlord insurance while I'm not residing in the country is proving very problematic. I really don't want to sell the house and have to figure out where to park the cap gains and not get a huge tax bill.
When did you last live there? You would likely be able to avoid capital gains on a sale under the 2 out of 5 rule.
Thanks for this! Looks like EFC is now SAI (Student Aid Index). Just did both calculators online, making wild but educated guesses for what our financial situation will be in 10 years - and both spit out a number around $40k (yay me). So does that mean (if accurate), that if their annual cost (COA) is less than that, we wouldn’t qualify for any federal financial aid?
Insurance is not my strong point but have you tried talking to an insurance broker versus captive agents?
