Who is the money whiz?

[CigarStone]

I am refinancing my cabin to get my former So off the deed and I have a couple questions I'm hoping someone can help with. I don't have a clue when it comes to how interest rates work on auto and home loans. The loan officers will give you an interest rate but that is magically different than the APR .... it's all greek to me.

So my question ..... When it's all said and done I will have a $10K - $15K cash out. After buying some cigars, is it smarter to pay down the truck loan or the cabin loan until I sell the cabin.

 

[rbbrock]

It will most likely make a bigger difference on the cabin as that's probably a much longer term, so paying it down early will avoid a lot of interest over the years.

 

[rbbrock]

These are just made up numbers to give an example, obviously.

On the left is a 25 year loan of $265,000 at 5%. On the right a 4 year loan of $50,000 at 9%. Both have an extra payment of $15,000 made in month 6. On the longer term loan, even though it's a lower rate, the interest saved is FAR more.

ETA: This assumes you will keep them both for a long time. If you are selling the cabin relatively soon, it won't make much of a difference.

 

[hydro-terp]

@JCinPA is a money guy. Not a loan guy though I think.

HT

 

[CigarStone]

It will most likely make a bigger difference on the cabin as that's probably a much longer term, so paying it down early will avoid a lot of interest over the years.

Thx. Soon I will have the interest rates on the truck and the cabin as well as the term on the cabin.

Plus I intend to sell the cabin in the next 3-4 months, once the weather breaks.

 

[rbbrock]

Thx. Soon I will have the interest rates on the truck and the cabin as well as the term on the cabin.

Plus I intend to sell the cabin in the next 3-4 months, once the weather breaks.

In that case just put it to whatever's a higher rate. If you do put it towards the cabin, you'll just get it back again when that sells, and can then put it on the truck note.

 

[CigarStone]

In that case just put it to whatever's a higher rate. If you do put it towards the cabin, you'll just get it back again when that sells, and can then put it on the truck note.

That's where I get lost. It's easy enough to compare the interest rates but what I'm not sure of is all the subtleties that affect how it's compounded and which one would net me a wiser Financial Choice?

 

[CBoukal]

These are just made up numbers to give an example, obviously.

On the left is a 25 year loan of $265,000 at 5%. On the right a 4 year loan of $50,000 at 9%. Both have an extra payment of $15,000 made in month 6. On the longer term loan, even though it's a lower rate, the interest saved is FAR more.

View attachment 103799

ETA: This assumes you will keep them both for a long time. If you are selling the cabin relatively soon, it won't make much of a difference.

hell yes, this called for a spreadsheet!!!!

 

[JCinPA]

In that case just put it to whatever's a higher rate. If you do put it towards the cabin, you'll just get it back again when that sells, and can then put it on the truck note.

Given your statements, I would agree with this. Disclaimer: Since I am a professional I have to say this is not financial advice. I cannot offer investment advice without knowing a lot of detail about your total financial situation, but I can offer some education and guidance. Because of licensing and strict regulation of financial advisors, I have to say that. [/disclaimer].

It is easy to convert an interest rate from x.xx% compounded quarterly into an APY and do the same for x.xx% compounded monthly using a financial calculator. If you send me a couple of structures in a PM I'll do that for you. @rbbrock was correct in that given you plan to sell the cabin in the not too distant future you probably ought to be looking at these from a cash flow perspective.

I have clients who say, "I have $7,000 I want to put in my IRA, but I have $7,000 of credit card debt, at 20%." I always suggest pay the debt down. Yes, the IRA may go up 20% in the next year. It can also go down 20% in the next year. People don't think of investing and debt as on a number line with both positive and negative results on either side of zero. Call things on the right saving, and things on the left as dissaving.

If you are paying 20% on a $7,000 credit card balance, that's $1,400 of negative interest if you want to look at it that way. It is not optional, you must pay it. So putting the $7,000 on the credit card balance yields a guaranteed, risk-free rate of return of 20% on that decision. People usually don't think of it that way, however, and many will put the money in their IRA, thinking about all the wonderful compounding they'll enjoy over the years. And though the IRA might do better in the next year, I'll take 20% risk-free and guaranteed rate of return every day and twice on Sunday.

Given two shorter-term debts, I would pay down the one with the higher rate, as rbbrock suggests. If the difference in nominal rate is 0.25% or more, I'd ignore the compounding period and just pay down the one with the bigger nominal number. Trying to equate them is not worth the effort, it's pretty immaterial. If they are very close, though, I can convert them into APY equivalents for you if you DM me the deets.