Low Rates Could Help You Escape with More Money

Copyright 2007 Brandy Sites

Copyright 2007 Brandy Sites

Good day. Allow me to introduce myself. My name is Ryan and I am the other quarter of this motley crue. I am the father figure of this cast. Having never used the term ‘father figure’ to describe myself before, I want to apologize for any misusage of the phrase to any fathers out there who lack a figure.

While my childhood wasn’t rough, I will admit I’ve come quite far from my initial naked, helpless state and I’d like to think that I played a pretty significant role in the formation of me. In raising myself, I long ago chose to withhold praise for myself and only allow it to pass through gritted teeth when the occasion absolutely deserves it. So, at most times I refer to myself as a ‘schemer’. Today, however, I feel that I can call myself a ‘planner’. Compliments feel so good!

I bought a small place almost immediately upon leaving college. It was my plan from taking a personal finance class in college to save as much as I could before kids and buying a house seemed right in line. This would be right around 2002 when the market was beginning to inflate. The rate was something like 7% (‘historic’ I was told from behind the mountain of papers). Eventually Brandy came to live with me and we stayed there three years. When we sold the place I made all my money back plus 15%, which I rolled into our current house.

Our current house started with a 30 year, 6.25% rate. We paid on that for 5 years barely scratching the principal. 2 years ago we re-financed to 3.5% for 15 years. What worked in our favor is that, with the rates so low, the monthly payments going from 30 at 6.25% to 15 at 3.5% really felt about the same. Also, our bank gave us one free re-fi.

So, now plans – knowing that we want to travel for an extended time in 2014 and assuming we can sell our house for the original cost (fairly reasonable in our neighborhood), how much would we have in pocket (ignoring fees, taxes and crap) when we sell in 2 years? Excel’s formulas were named using the Fortran convention so it’s impossible to speculate what CUMPR8 actually does until you use it so let’s try to work this out together using papyrus.

Let’s travel back in time two years and look at the values we’ll need.

S – The cost of our house two years ago.

I – Our interest rate divided by 12. Divided by twelve since most house payments are monthly.

P – Monthly payment N – The amount of time we’re interested in. This should be in months as well.

The formula is pretty complex but it can be derived – by someone else. Here are bite size chunks…

Step 1 – Add your 1 to I.

Step 2 – Raise this to the power of N. So, (1+I)^N

Step 3 – Multiply that by S

Step 4 – Write that down somewhere and circle it with a big smiley face

Step 5 – Repeat Step 1 & 2. Subtract 1 from this mess.

Step 6 – Multiply this by (P/I)

Step 7 – Take Step 4’s result and subtract Step 6’s result

Step 8 – This is the loan balance. You’re done. Reflect on why as a kid you hated math.

Example – After 2 years, how much is still owed on a $100K house with an interest rate of 3.5% and monthly payments of $721?

Step 1 – 1+(.035/12) = 1.00291667

Step 2 – (1.00291667) ^ 24 = 1.07239

Step 3 – 1.07239*100000 = 107239

Step 4 – 🙂

Step 5 – 1.07239-1 = .07239

Step 6 – P/I = 721/(.035/12) = 247199, 247199 * .07239 = 17895

Step 7 – 107239-17895= $89344

Not bad. This is around 10.5% of your house’s value in equity. In our case, since we putzed around with a previous mortgage, we’re a bit over this number at present day.

Now what happens after 4 years? The answer – 21.8%. 6 years? 33.9%. If we would have stayed at our original 6.25%, we would only have 2. 4% (it was a 30 year loan). After 4 years, 5.2%. This is a striking reduction from 21.8%. What’s my point? Even if your travel is still far out, start thinking now how you can maximize the money you’re left with after the selling of all your stuff. For some people, renting is the answer as their timetables may be shorter.

Whatever your plans, have a plan!

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