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Hey financial knowing stuff type guys!

 
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spacey
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Hey financial knowing stuff type guys!
« on: February 03, 2008, 01:25:28 PM »

Some quick background:

1) I am a financial idiot and an ultimate-consumer type who if it weren't for my wife's spendthrift fiscally conservative compulsions would likely be one of the millions of Americans over my head in debt;
2) Thanks to my wife, I am not over my head in debt and we sit very well with regards to debt-to-income ratio;
3) We are approximately 5 years into a 30 year mortgage on our house that represents approximately 56% of the appraised value of our home and have a 2nd mortgage of approximately 20% of the value of our home, scheduled to be paid off in just under 10 years;
4) We have almost no revolving/consumer debt and very seldom carry a balance on our credit cards;
5) We have a decent but not obscene amount of student loan debt, fixed at a nearly nonexistent APR;
6) My car is paid in full and is in good operating condition, needing a small amount of regular maintenance here and there. We are making payments on the wife's car, scheduled to be paid off in 4 years, and my motorcycle, scheduled to be paid off in 6.

The wife met with a financial adviser who ran some numbers on all our obligations and put together a proposal to consolidate it all and have all obligations paid in full in 15 years. The monthly payments would come out about 90% of what we currently pay each month. This consolidation would include all debt, including vehicle loans scheduled to be paid off much sooner, but lein-free titles would be given to us on both vehicles. The only lein would be on the house.

Realizing much of this involves essentially "robbing Peter to pay Paul," by lengthening some finance periods to shorten others, we stand to save around $200,000 on mortgage interest in this scenario. The scheduled payments are easily affordable, and do not put us in any financial strain or limit our ability to deal with unscheduled financial obligations as they arise.

The big drawback I see is that we will essentially owe money on vehicles we likely will not keep for the amount of time we will owe on them, and that sometime in that 15 years we will likely have to replace at least one if not both of our primary vehicles. Given the amount we stand to save in the long run, however, it seems like it's a worthwhile trade off. Am I way off base? Are there other pitfalls I'm not seeing and should be aware of? Why should we do this? Why should we not?

As a reminder, I'm a financial idiot, so please keep advice in language someone of my intellectual lacking on the subject will understand. Thanks in advance.
« Last Edit: February 03, 2008, 10:05:34 PM by spacey » Logged Return to Top
twoiron
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Re: Hey financial knowing stuff type guys!
« Reply #1 on: February 03, 2008, 01:37:29 PM »

Legislation prevents me from providing Financial Advice specific to your situation.

 Wink
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Uisce Beatha
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Re: Hey financial knowing stuff type guys!
« Reply #2 on: February 03, 2008, 08:04:43 PM »

Take the 10% you save on total payments and invest or pay down extra principal.  That'll make the fake pain you feel about the car and bike seem like nothing in the long run.  Keep in mind you'll hold those titles too.  That helps.

Consolidating is almost always a fantastic idea if (a) the math works out (big duh) and (b) you're disciplined enough to stick it without getting another second or other consumer debt.  Only you know the answer to (b).

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Aske
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Re: Hey financial knowing stuff type guys!
« Reply #3 on: February 03, 2008, 08:10:22 PM »

maybe i'm just drunk, but smaller payments over a smaller horizon...

how is this bad?
 Huh?
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spacey
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Re: Hey financial knowing stuff type guys!
« Reply #4 on: February 03, 2008, 08:14:38 PM »

maybe i'm just drunk, but smaller payments over a smaller horizon...

how is this bad?
 Huh?
The payments are only smaller over the course of 6 years until the bike and the car would be paid off, then we'd actually be paying more over the next 9.

I know it seems like a no-brainer in the end, particularly given the savings in interest, but like I say I am a financial idiot, so I'm just looking to see if there's a downside that I'm not seeing.
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Fuzzy
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Re: Hey financial knowing stuff type guys!
« Reply #5 on: February 03, 2008, 08:20:26 PM »

Agree with UB on the 10%. In your case I guess I would lean toward investing because it could be somewhat liquid in case of emergency. YMMV.

Other than that I think its a no brainer. My wife and I did something similar 5 years ago. Our goal is to get the house paid off. We didn't have much in debt to consolidate but we knocked 5 years off the back end of our mortgage and lowered the monthly.

I've used the monthly difference to invest back into college funds. Double bonus.

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hobbit
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Re: Hey financial knowing stuff type guys!
« Reply #6 on: February 03, 2008, 08:50:43 PM »

** I'm not a financial professional, and know next to nothing about consolidation loans.  (which means you may want to stop reading right now Wink


Do you have a debt problem?  If you are able to make your payments on your home, vehicles, student loans AND have no revolving debt or abuse of credit cards AND are able to fund retirement programs (401k, etc.) - I would say you don't.  So don't panic or get pushed into something.  Too often, people treat any debt like bad debt and thats just not true.  Vehicles are not good (depreciation), but usually short term.  Student loans usually pay themselves back easily enough that most loan officers ignore them (not-bad debt).  A home usually appreciates in value (not-bad debt - but interest front loaded).  None of this means much other than to point out you may not have a problem, so don't jump at something without fully checking it out and understanding how the consolidator is making its money in this transaction.

Ask the adviser about vehicle purchases - as you said, its highly unlikely you go 15 years without buying a few.  You should know up front if thats just new debt, or can be rolled into the consolidation loan at its rates.  You don't want to be surprised later when you buy a vehicle and are now making 120% of the payments you are now instead of the 90% you're being shown - all for the same stuff.

Carefully look at the math - a $200,000 interest savings sounds awfully/too good (but with a 2nd mortgage, not impossible I guess).

Some years back I refinanced my home, got a better rate when I went from 30 years to 15 for the same monthly payment.  So I knocked off 10+ years from the back of my loan just like that.  There may be things you can do on your own - especially as the Fed keep dropping rates (too far perhaps - we have yet to see).

Its also useful to look at the rates you are currently paying.  If you have someone else's money at 6% (money they gave you to buy a home for instance) and can use that money to invest and earn 10% or more.... something to think about.  The market has been volatile recently and may not have hit its 'bottom' yet, but so what - check on it 5 years from now and you'll be UP 10% or more annually (on average).  Again, front loaded interest on a mortgage makes the math on this more complicated than I just demonstrated.


So many options I know.  But if it (consolidation) all checks out, I see no real downside - but again, know nothing about consolidation loans.

« Last Edit: February 03, 2008, 08:52:38 PM by hobbit » Logged Return to Top

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gleek
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Re: Hey financial knowing stuff type guys!
« Reply #7 on: February 03, 2008, 09:50:56 PM »

Some quick background:

1) I am a financial idiot and an ultimate-consumer type who if it weren't for my wife's spendthrift compulsions would likely be one of the millions of Americans over my head in debt;

I thought "spendthrift" actually meant "wasteful spender".  Grin

The way I look at this is that by consolidating your loans, you get the benefit of tax deductions on the interest being paid (i.e. you reduce the interest rate on your car loans to whatever the mortgage rate is (presumably lower) AND you're getting Uncle Sam to cover about 30% of THAT amount). Another thing to think about is that you are turning your 4-5 year car loan into a 15-year loan AND your 10-year 2nd into a 15-year loan. However, you are also turning your 25-year 1st into a 15-year loan (if I'm reading your situation correctly).

I would definitely do this if the rate on the new loan is lower than your current loans. If the thought of paying interest on a car for 15 years bugs you, you should continue to make the same total payment that you are making now (i.e. 1st+2nd mortgage+car loans+student loans). My understanding is that if you pay 10% over your monthly P&I, you can reduce the loan period by almost 1/3rd. IOW, your 15-year obligation would become a 10-year obligation. That will make the thought of paying 10 years of interest on a car easier to stomach.

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spacey
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Re: Hey financial knowing stuff type guys!
« Reply #8 on: February 03, 2008, 10:03:24 PM »

Some quick background:

1) I am a financial idiot and an ultimate-consumer type who if it weren't for my wife's spendthrift compulsions would likely be one of the millions of Americans over my head in debt;

I thought "spendthrift" actually meant "wasteful spender".  Grin
Dammit! I really shouldn't try to type this crap on my way out the door.  Sad
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Re: Hey financial knowing stuff type guys!
« Reply #9 on: February 03, 2008, 10:12:05 PM »

You're essentially making one 15-year mortgage out of (1) your existing mortgage; (2) your second mortgage; (3) your student loans; (4) your wife's car loan; and (5) your motorcycle loan.  By doing so, you apply all of those obligations -- and especially the last three -- solely against the equity in your home.

Would you buy a car or motorcycle using a home equity loan/equity line of credit (instead of getting an auto loan, as you did for both these vehicles)?

Would you pay off your student loans using a home equity loan/equity line of credit?


And not to be a prick about it, but ... your wife's car is the Mini, right?  You bought that two years USED, right?  And your bike is a 12-year-old USED model, too, right?  Why the *fudge* are you taking such long loan periods for used motor vehicles?
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Clive
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Re: Hey financial knowing stuff type guys!
« Reply #10 on: February 03, 2008, 10:13:17 PM »

I thought "spendthrift" actually meant "wasteful spender".  Grin
Dammit! I really shouldn't try to type this crap on my way out the door.  Sad
I've always preferred wastrel.
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spacey
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Re: Hey financial knowing stuff type guys!
« Reply #11 on: February 03, 2008, 10:26:10 PM »

And not to be a prick about it, but ... your wife's car is the Mini, right?  You bought that two years USED, right?  And your bike is a 12-year-old USED model, too, right?  Why the *fudge* are you taking such long loan periods for used motor vehicles?

You shame me.  Sad

I have always financed my vehicles at the lowest rate offered over the longest period offered at that rate, making extra payments in order to pay off early. I don't know why, I've just always felt better with a bit of flexibility in my monthly payments in case I have an unexpected emergency. I realize there are probably better ways to approach it, but I remind you of my financial idiocy. The longest it's ever taken me to pay off a vehicle has been 4 years (the Pathfinder) and we are on track to pay off both the Harley and the MINI much sooner than they are scheduled. Unless, of course, we go this route.

Your mentions of using home equity to buy a car or go to school are precisely the things that cause me to hesitate. The wife, however, is pretty gung-ho on the idea.
« Last Edit: February 03, 2008, 10:34:12 PM by spacey » Logged Return to Top
Clive
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Re: Hey financial knowing stuff type guys!
« Reply #12 on: February 03, 2008, 10:40:25 PM »

Well, that's not as bad as I thought.  A workable approach, so long as you have the discipline to make those extra payments.  One downside is that it adds negatively to your debt profile (or whatever they call it when you're looking for a loan and they size up your existing obligations and terms of payments).

Lots of people have/use home-equity loans and/or equity lines of credit.  Others don't touch these financial products, wanting to preserve as much equity as possible.

The two pointed questions about how you'd use your equity were to get you thinking, not to make some implicit statement.  It's just how I'd go about deciding.  If my student loans were at some ridiculously low rate, I'd keep them there.  Personally, I wouldn't "spend" home equity to buy a motor vehicle.  So for me, I'd basically be refinancing the mortgage and second mortgage.  Call me crazy, but I'm guessing the adviser won't be so hot to trot if that's all the debt you're looking to ante up.
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spacey
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Re: Hey financial knowing stuff type guys!
« Reply #13 on: February 03, 2008, 10:53:20 PM »

So for me, I'd basically be refinancing the mortgage and second mortgage.  Call me crazy, but I'm guessing the adviser won't be so hot to trot if that's all the debt you're looking to ante up.

That's precisely where I went as soon as the wife brought up the entire scenario. I'd much rather attempt to consolidate our long-term stuff without combining the short term, but I don't know how interested they'd be in that case, or, for that matter, how the numbers shake out.

She's going with the "look at the 'big picture'" scenario, i.e. we'll own the house free and clear in 15 years and for at least part of that equation it won't cost us more than it does right now. My mind keeps heading towards the "yeah, but what about when we need to replace one of the cars and we're still paying for the one we don't have anymore?" part of the equation. Though taking the saved 10% and applying it towards the principle balance to pay off early probably does take some of the sting off.

Currently the balance on the MINI and the Harley are much less than their book values so I consider them to be relatively liquid. Same goes for the house vis a vis appraised value. Student loans, I don't even consider.

The idea of being free and clear in 15 years is appealing, but I just can't shake the unease I have about leveraging essentially every major asset we have against the value of our home.
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Clive
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Re: Hey financial knowing stuff type guys!
« Reply #14 on: February 03, 2008, 11:17:07 PM »

She's going with the "look at the 'big picture'" scenario, i.e. we'll own the house free and clear in 15 years and for at least part of that equation it won't cost us more than it does right now. My mind keeps heading towards the "yeah, but what about when we need to replace one of the cars and we're still paying for the one we don't have anymore?" part of the equation.
Like hobbit said, there's bad debt and there's not-so-bad debt.  I'd rather pay a mortgage for 20 years and eliminate my higher-interest debt (car and bike) in 3 or 4 years.  Even if the grant total of interest paid worked against me, I just like having low-interest debt against an asset I can further borrow against, if need be, and the ability to sell a motor vehicle cleanly (no debt, title in hand), if need be.  But again, that's just me -- I'm not a financial guy for a living.
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