Episode 31: A Second Mortgage

Nate and Danielle talk about their new home equity loan and how it fits into their budget. The reasons why the loan was taken out along with a discussion on how to determine if you can afford a loan are discussed. They also look at the benefits of low-interest rates and how putting extra money on your loans can dramatically lower their payoff period.

Show Notes

We moved ahead with our home equity loan (we actually signed the closing documents today!). Let’s breakdown the loan and how it works.

• $30K loan
• 3.74% interest rate
• 5 year terms
• Monthly payment $548.98

Now, this is a second mortgage. Our first mortgage has a monthly payment of $1700 and this is $550, so our total payment is $2250 a month. This equates to 24% of our monthly take-home pay. So it fits into our budgeting ratio without an issue. Listen to Episode 24 for our recommendations on budgeting ratios.

Now if you take that monthly payment and multiply it by 60 (5 years) you get something interesting. The total that we will have paid on the loan is $32,938.80. That means that we will have paid $2,938.80 in interest or 9.76%!

But our interest rate is 3.74%. 3.74% of $30K is $1,122. So we are paying a little over $1,800 extra.

That’s not how this is calculated. Bankers use an amortization schedule which calculates interest payment each month. Your interest rate is given at a yearly level. 

So to review we have a $30,000 loan over 5 years. What happens if we put extra on the loan?

• Extra $100: 10 months on length of the loan and about $500
• Extra $200: 1 year and 5 months saved and $844 saved
• Extra $300: 1 year and 10 months and $1,100 saved
• Extra $400: 2 years and 2 months saved and $1300 saved
• Extra $500: 2 years and 5 months saved and $1468 saved

Links to the calculators used will be in the show notes. The main thing here is that a little bit extra on a loan allows you to pay it off massively faster. $100 a month saves you almost a year in loan payments. Freeing up a year’s worth of payments for other things.