Help re: home payment

**jIM_Ohio** · 08-26-2008, 12:27 PM

Does the interest rate change on any of the choices? Usually a 15 year has a lower interest rate than a 30 year.

I would go the 15 year for a short amount of time at minimum. Reasons are you have 2.5 years where you have not paid any principal- at minimum I would catch up to ammortization table on 30 yr fixed (find the equity you would have had on 30 yr fixed, and make 15 year payment until the equity is same as that payment on a 30 yr fixed).

The fact you have $2000/month to put towards problem also factored into that advice.

I would also advise to increase rent to attempt to pay the interest only amount.

**savemachine** · 08-26-2008, 04:17 PM

Hey Jim,

The interest only locks up for 7 years, so it's going to be chance in 2013.

I'm looking to refinance but since my property value right now is going to be less than my loan amount, it's probably not a great idea.

My ultimate questions would be which option is better?

1. Pay the 15 years amortized payment at $2,965.72
or
2. Pay the interest only option at $1,801.90 with $1163.82 to the principle each month

Which option is better, or if there's any difference?

V/R

**disneysteve** · 08-26-2008, 04:43 PM

Originally posted by savemachine View Post

It's an investment property.

So far, I've only been paying an interest only at 1801.90. There are people renting my house at 1175 a month, so roughly I pay out of pocket at around 630ish a month.

Explain to me what your plan is here. What is the point of owning an "investment" that is costing you $630/month out of pocket? By my definition, an investment is something I purchase to MAKE money, not to lose over $600/month.

How upside down are you on the house right now? In other words, how much would you lose if you sold it? Right now you are losing over $7,500/year by keeping it.

**jIM_Ohio** · 08-26-2008, 05:22 PM

Originally posted by disneysteve View Post

Explain to me what your plan is here. What is the point of owning an "investment" that is costing you $630/month out of pocket? By my definition, an investment is something I purchase to MAKE money, not to lose over $600/month.

How upside down are you on the house right now? In other words, how much would you lose if you sold it? Right now you are losing over $7,500/year by keeping it.

My thoughts exactly.

Hey Jim,

The interest only locks up for 7 years, so it's going to be chance in 2013.

I'm looking to refinance but since my property value right now is going to be less than my loan amount, it's probably not a great idea.

My ultimate questions would be which option is better?

1. Pay the 15 years amortized payment at $2,965.72
or
2. Pay the interest only option at $1,801.90 with $1163.82 to the principle each month

Which option is better, or if there's any difference?

V/R

You did not provide enough info to give input. In general get a fixed rate loan and make the payments on that. If you cannot do that, pay principal down as fast as you can.

**savemachine** · 08-27-2008, 09:06 AM

I think I am putting this incorrectly. I'm hoping it to be an investment property in the long term. I'm losing about 630 a month right now, but I'm hoping to generate residual income from it in the future.

In best cases, if the home price does go up again, I will be selling it.

If I do sell the home right now, it will be sold for quite a bit less than what I owe plus the down payment and extra principal payments I've made thus far.

My idea of keeping it is for the house to be a future residual income in the future, but in the mean time if the price of the house goes up again, I would sell it?

I know about it taking a while to recoop after I had paid off the house for the rental income to actually catch up with the the money I've spent, but I figured, if I pay down the house faster on the principal, the monthly interest will become less (right now the interest is about 1400 dollars, the 1801.90 payment includes both tax and insurance), so I'm not that far off from the rent actually covering the payment. It just depends on how fast and how much I can pay down the principal correct?

Thanks for all the help guys.

**jIM_Ohio** · 08-27-2008, 09:26 AM

savemachine- I think you don't have a clear picture painted for yourself.

I cannot determine if you have a plan to keep it or sell it, and I don't know how upsidedown you are on the rental. What about increasing the rent?

**savemachine** · 08-27-2008, 09:57 AM

Jim,

I'm pretty new to the investment scene. I was actually just fortunate enough to have some savings, decent paying job and houses (from my mom). My goal is to actually acheive financial security by having rental properties.

Having said that, my Las Vegas home which is the topic of discussion at hand, was pretty much bought at the wrongggggg time due to my inexperience. I am again, fortunate enough to be able to find renters and pay for the difference. Now that I have 2000 dollars extra in cash every month, I'm planning to split them in half and put that towards the mortgage.

To answer your question though. I would keep the place, if I cannot sell it at a good price (meaning 50K above what I paid for minus the interests I had paid). This scenario is looking very likely since the housing market is in a slump, but I am thinking by the time the market might turn around again, if I keep at it I can just about pay off the house within 12 years or less.

I have also been increasing the rent every year at about 50 dollars per month.

My "financial security" plan is quite simple, but it probably will probably be full of holes to the expert. Pay off/down the Las Vegas home as fast as I can, after that's done move out of my current home in California and get a new place using the rental income from the California places and Las Vegas to help play for the mortgage of a new place, and the cycle repeats.

Once again, this might be a very naive thought to experienced investors, so please go a bit easy on me.

**noppenbd** · 08-27-2008, 10:09 AM

One thing you have not mentioned is the reset on the ARM. Is your current payment based on the initial ARM rate or has it started to float? If it has not reset yet you may be in for a payment shock when that happens. Review your loan documents thoroughly and let us know.

**jIM_Ohio** · 08-27-2008, 10:11 AM

Originally posted by savemachine View Post

Jim,

I'm pretty new to the investment scene. I was actually just fortunate enough to have some savings, decent paying job and houses (from my mom). My goal is to actually acheive financial security by having rental properties.

Having said that, my Las Vegas home which is the topic of discussion at hand, was pretty much bought at the wrongggggg time due to my inexperience. I am again, fortunate enough to be able to find renters and pay for the difference. Now that I have 2000 dollars extra in cash every month, I'm planning to split them in half and put that towards the mortgage.

To answer your question though. I would keep the place, if I cannot sell it at a good price (meaning 50K above what I paid for minus the interests I had paid). This scenario is looking very likely since the housing market is in a slump, but I am thinking by the time the market might turn around again, if I keep at it I can just about pay off the house within 12 years or less.

I have also been increasing the rent every year at about 50 dollars per month.

My "financial security" plan is quite simple, but it probably will probably be full of holes to the expert. Pay off/down the Las Vegas home as fast as I can, after that's done move out of my current home in California and get a new place using the rental income from the California places and Las Vegas to help play for the mortgage of a new place, and the cycle repeats.

Once again, this might be a very naive thought to experienced investors, so please go a bit easy on me.

Your numbers side of the business need some work.

If rent is $1000 and you increase it $50, that is a 5% increase.

If rent is $1500 and you increase it $50 that is a 3% increase.

Financial independance (financial security) will not be found with 3% growth, and with 5% growth you might be waiting way too long. Think 10% as the target growth. Granted you might have a different plan, but you have not stated it yet.

When I rented for $650/month in 1997, my monthly rent increases were $20 if I signed another 12 month lease. $20/650=3%. That complex had HUNDREDS of units. You have one unit- so you need to think bigger to keep yourself in business.

I would create a 5 year plan to make up the $600 difference.

$50 this year
$75 next
$100 the next
$105 the next
$110 the next
$160 the next

Keep sending the extra to the principal- the sooner the properties are paid off, the sooner you could borrow against it and purchase another.

Generally speaking it makes sense to have the rental properties leveraged and to have more than 1 property generating you rental income. Spreads your risk out.
But getting the first property in the black should be the priority.

**disneysteve** · 08-27-2008, 10:28 AM

Originally posted by savemachine View Post

My goal is to actually acheive financial security by having rental properties.

You will never achieve financial security by having rental properties that are operating at a loss.

You say you wouldn't sell unless you could get at least $50,000 more than you paid. You are overlooking the fact that you are currently losing $7,500/year. So in one year, you will be $7,500 further behind. In 2 years, $15,000 further behind. You are losing ground with each passing month. And you certainly can't make up a $630/month shortfall through rent increases.

I think you really need to consider selling this place.

**savemachine** · 08-27-2008, 10:47 AM

Jim,

Thank you for the suggestion. It turns out that I have not mentioned a couple of things. The first one being the two homes from my mother has already been paid off, one of which I am living in. The other one is taking in about 1200 dollars per month (it's time to increase that too), but that 1200 dollars is going somewhere else right now. That amount of money will be freed after 2-3 years however. Therefore, I already have 2 properties in the black through my mother.

I understand your sentiment regarding increasing the rental prices, however I am working on the premise that the more money I pay towards the principal, the less the interest will be after each month. The faster I pay for the principal, the faster the interest will lower. Is that something to take into account when I am calculating how much rent I should be charging? I don't want to scar my tennants off.

I'm such a newbie that I haven't even thought about borrowing against the properties to purchase another one, so I thank you for mentioning that. This whole experience has been pretty rough because I started knowing absolutely nothing about real estate but jumped on the very last of the bandwagon. At the moment, I am learning a lot more (mostly from this forum), but things are still very fuzzy to me.

Thank you for taking the time to address my problem. It is greatly appreciated.

**savemachine** · 08-27-2008, 10:50 AM

Originally posted by disneysteve View Post

You will never achieve financial security by having rental properties that are operating at a loss.

You say you wouldn't sell unless you could get at least $50,000 more than you paid. You are overlooking the fact that you are currently losing $7,500/year. So in one year, you will be $7,500 further behind. In 2 years, $15,000 further behind. You are losing ground with each passing month. And you certainly can't make up a $630/month shortfall through rent increases.

I think you really need to consider selling this place.

Steve,

What if I am willing to put more money towards the principle as I had suggested and plan a long term goal by making this a rental property in the future. Could the principal payment not help offset the loss I am taking each year? I thought that all I'm trying to do was just that I am bulding equity by paying more towards principle, and lower the interests in the meantime.

**savemachine** · 08-27-2008, 10:52 AM

Originally posted by noppenbd View Post

One thing you have not mentioned is the reset on the ARM. Is your current payment based on the initial ARM rate or has it started to float? If it has not reset yet you may be in for a payment shock when that happens. Review your loan documents thoroughly and let us know.

I am fixed at 6.625 interest only for 7 years, which will end in 2013. I am hoping to be able to pay down a considerable amount of principle by the time I refinance.

By the way, all you're saying above is pretty greek to me in regards to resetting of the ARM. I'll have to look at up before I can comment further.

I think I am the perfect example of why the US housing market is the way it is right now.

**disneysteve** · 08-27-2008, 12:04 PM

Originally posted by savemachine View Post

Steve,

What if I am willing to put more money towards the principle as I had suggested and plan a long term goal by making this a rental property in the future. Could the principal payment not help offset the loss I am taking each year? I thought that all I'm trying to do was just that I am bulding equity by paying more towards principle, and lower the interests in the meantime.

I'm not sure how to explain this clearly, so forgive me, but making extra payments to principal has no bearing on whether or not you are making a profit or a loss on the home. If you are losing money, you are losing money. Putting more of your own money into it doesn't change that. If your expenses exceed your income by $630/month, prepaying the mortgage doesn't change that. Yes, prepaying will save you money in interest but it doesn't do anything to stop that monthly loss. Does that make sense?

Originally posted by savemachine View Post

all you're saying above is pretty greek to me in regards to resetting of the ARM.

I think I am the perfect example of why the US housing market is the way it is right now.

I'm concerned that you seem to not fully understand the terms of your loan. Unfortunately, you are correct that that is part of why the housing market got into so much trouble. Many people bought homes that they couldn't really afford with loans that they didn't understand. When rates adjusted on ARMs or principal payments started on interest-only loans, many people found themselves with payments that they simply couldn't afford. Mix in the fact that property values fell leaving many people upside down on their loans (owing more than the home was worth, usually because they either put little to no money down or borrowed all of their equity) and you see where that has brought us.

You need to review your loan contract and make sure you understand the terms. What is the current rate? When does the fixed period end? What will the rate adjust to at that time and what will your payments be then? If you can't answer those questions, you need to call the lender and get him to explain it to you.

Help re: home payment