2 years, 2 months ago
If you have two loans, what is the best way to pay them off?
Trying to help a friend make the best financial decision possible.
Given two HELOC loans
Loan #1 - 25K owed 25K max credit, at prime PLUS .5%
Loan #2 - 18K owed, 25K mac credit, at prime MINUS 1.01%
So loan #2 is clearly the better deal. No money is being spent against loan #2, nor will it ever, these are going to be paid and kept as emergency funds.
There are two different banks, Bank #1 will not match Bank #2's interest rates, merging the two loans into one is not an option. They also would probably re-appriase the home, which in this economy, may not be enough to cover adding in another 25K or so.
Both loans need a payment every month; Loan #1 gets paid just interest, Loan #2 gets paid interest plus whatever else is left over, usually a few hundred dollars.
Would it be better to pay the high interest loan with the excess few hundred every month, or continue to try to clear out the low interest loan, and then work on the high interest loan? Or perhaps a mixture of both.
Neither make it easy to make payments, neither have very sophisticated online payment systems, one charges a fee for making an online payment, the other requires you to call in and make a payment.
Suggestions are appreciated so I can pass this along to my friend.
Given two HELOC loans
Loan #1 - 25K owed 25K max credit, at prime PLUS .5%
Loan #2 - 18K owed, 25K mac credit, at prime MINUS 1.01%
So loan #2 is clearly the better deal. No money is being spent against loan #2, nor will it ever, these are going to be paid and kept as emergency funds.
There are two different banks, Bank #1 will not match Bank #2's interest rates, merging the two loans into one is not an option. They also would probably re-appriase the home, which in this economy, may not be enough to cover adding in another 25K or so.
Both loans need a payment every month; Loan #1 gets paid just interest, Loan #2 gets paid interest plus whatever else is left over, usually a few hundred dollars.
Would it be better to pay the high interest loan with the excess few hundred every month, or continue to try to clear out the low interest loan, and then work on the high interest loan? Or perhaps a mixture of both.
Neither make it easy to make payments, neither have very sophisticated online payment systems, one charges a fee for making an online payment, the other requires you to call in and make a payment.
Suggestions are appreciated so I can pass this along to my friend.
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M$3 Answers
You have 2 loans. The best way to pay them off is easy.
First the loan that has the higher interest rate.
You make higher payments on that until it is gone. The other loan you make the min payment.
Once the loan is paid off you then use that money to pay off the second loan faster.
This plan can work with many loans. If you spend an extra 200 a month in the beginning and keep to the plan. You can own a 30 year house in around 7 to 10 years. Depending on how many bills you have.
Example.
loan 1 100,000 payment 1,000
loan 2 40,000 payment 400
loan 3 35,000 payment 350
loan 4 80,000 payment 800
you pay off the 350 loan first. by making your payment 550. (200) extra..
It cuts the time down ALOT..
then you pay the 400 loan. but instead of paying 600 you are paying 950 towards it. Because you are still spending the same amount of money each month. Just 1 less bill..
then you have the 800 loan.. but now you are paying 1750 towards in. and you have 2 bills gone. Still spending the same.
then you have the 1000 loan. but now you spend 2750 towards it. And all other bills are gone.
you own everything within 7-10 years. By sticking to the plan. with just 200 dollars that you would blow a month going out 4 times a month.
The amounts are high for example. but you get the point.
I taught my friend how to do this. He is only 2 years away from owning his 200,000 house in 9 years. And he is debt free of all other loans. I will admit. the first 2 years are hard. but after that it get easy.
First the loan that has the higher interest rate.
You make higher payments on that until it is gone. The other loan you make the min payment.
Once the loan is paid off you then use that money to pay off the second loan faster.
This plan can work with many loans. If you spend an extra 200 a month in the beginning and keep to the plan. You can own a 30 year house in around 7 to 10 years. Depending on how many bills you have.
Example.
loan 1 100,000 payment 1,000
loan 2 40,000 payment 400
loan 3 35,000 payment 350
loan 4 80,000 payment 800
you pay off the 350 loan first. by making your payment 550. (200) extra..
It cuts the time down ALOT..
then you pay the 400 loan. but instead of paying 600 you are paying 950 towards it. Because you are still spending the same amount of money each month. Just 1 less bill..
then you have the 800 loan.. but now you are paying 1750 towards in. and you have 2 bills gone. Still spending the same.
then you have the 1000 loan. but now you spend 2750 towards it. And all other bills are gone.
you own everything within 7-10 years. By sticking to the plan. with just 200 dollars that you would blow a month going out 4 times a month.
The amounts are high for example. but you get the point.
I taught my friend how to do this. He is only 2 years away from owning his 200,000 house in 9 years. And he is debt free of all other loans. I will admit. the first 2 years are hard. but after that it get easy.
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M$Report Abuse
Given that the APR of HELOC #1 is higher, and that both require at least payment of interest, the most financially advantageous solution is to pay just interest on HELOC #2 (the lower rate one) and pay as much against principle as possible, in addition to the interest, on loan #1 (the higher rate one). This has the advantage of reducing the total interest more quickly than the current situation. To see how this plays out, use the current WSJ prime rate of 3.25% (from http://www.bankrate.com/rates/interest-rates/prime-rate.aspx ) to calculate the interest rates of HELOC #1 as 3.75%, and that of HELOC #2 as 2.74%.
Using these interest rates for every $1000 of principle reduction in HELOC #1 you save $3.13/month (at the current interest rate) as opposed to $1.87/month from reducing the HELOC #2 principle by the same $1000.
Next, you should be clear whether these are HELOCs (i.e. Home Equity Lines of Credit) or home equity *loans*. If the former, then one can increase or decrease the principle of either or both (at least during the HELOC phase). If the latter, you cannot withdraw any further money and thereby increase the principle on either one. However, if you can draw another $7k from HELOC #2, this opens the following additional option.
If you are allowed to increase the principle on HELOC #2, you may want to consider maxing that one out, and using the resulting $7k to pay down the principle on HELOC #1 immediately by that amount. Then, continue as above, paying the interest only on HELOC #2, while paying interest and as much against principle as possible on HELOC #1.
The advantage of this last would be that the monthly interest payments would immediately drop by the difference in interest between the two HELOCs, multiplied by the $7k, which in this case would be about $8.81. This can then be used to decrease the amount owed on HELOC #1 by a further $106 per year. This can be seen by comparing the two cases - (1) HELOC #1 principle $25k & HELOC #2 principle $18k; (2) HELOC #1 principle $18k & HELOC #2 principle $25k. In case (1), the interest on the two HELOCs together is ~$112/month. In case (2) it is ~$103/month. Thus, by moving $7k from HELOC #2 to HELOC#1, without any injection of external funds to reduce the overall amount owed, the interest payment is reduced by nearly 8% ($8.81/month).
Disclaimer: The above is intended for informational purposes only. You should consult with a financial professional before making significant financial decisions.
Using these interest rates for every $1000 of principle reduction in HELOC #1 you save $3.13/month (at the current interest rate) as opposed to $1.87/month from reducing the HELOC #2 principle by the same $1000.
Next, you should be clear whether these are HELOCs (i.e. Home Equity Lines of Credit) or home equity *loans*. If the former, then one can increase or decrease the principle of either or both (at least during the HELOC phase). If the latter, you cannot withdraw any further money and thereby increase the principle on either one. However, if you can draw another $7k from HELOC #2, this opens the following additional option.
If you are allowed to increase the principle on HELOC #2, you may want to consider maxing that one out, and using the resulting $7k to pay down the principle on HELOC #1 immediately by that amount. Then, continue as above, paying the interest only on HELOC #2, while paying interest and as much against principle as possible on HELOC #1.
The advantage of this last would be that the monthly interest payments would immediately drop by the difference in interest between the two HELOCs, multiplied by the $7k, which in this case would be about $8.81. This can then be used to decrease the amount owed on HELOC #1 by a further $106 per year. This can be seen by comparing the two cases - (1) HELOC #1 principle $25k & HELOC #2 principle $18k; (2) HELOC #1 principle $18k & HELOC #2 principle $25k. In case (1), the interest on the two HELOCs together is ~$112/month. In case (2) it is ~$103/month. Thus, by moving $7k from HELOC #2 to HELOC#1, without any injection of external funds to reduce the overall amount owed, the interest payment is reduced by nearly 8% ($8.81/month).
Disclaimer: The above is intended for informational purposes only. You should consult with a financial professional before making significant financial decisions.
You can leave an optional "tip" with Mahalo's virtual currency, Mahalo Dollars. If you are asking a difficult question that might require some research, or if you'd like a wide variety of feedback, a higher tip often leads to more answers to your question.
M$
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I have taken out loans several times to take for debt consolidation and purchasing a vehicle. Signing up is easy and the qualification process is straight forward.
* Create your listing
* Lenders choose to invest in your plan
* Receive your money
* Make monthly payments
Sign up now!
You can leave an optional "tip" with Mahalo's virtual currency, Mahalo Dollars. If you are asking a difficult question that might require some research, or if you'd like a wide variety of feedback, a higher tip often leads to more answers to your question.
M$
