Your Questions About Save Loan Schedule

Joseph asks…

5 yrs loan of $50K with int rate of 6.25% ~$968.45 mthly for 60 mos. no prepay penalty. do i save if i prepay

home equity loans of 50K. loan schedule of $968/mos. while no prepayment penalty. do i actually save if i repay the amount within one yr?

John answers:

Yep you should save all the interest you would have paid had you carried on the repayments for the full term. E.g. You’ll save on the final 4 years worth of interest.

Beware though, presuming your loan is set up as a normal loan then the interest will be front-loaded (you pay more interest at the start of the agreement than at the end). So you will not save on four-fifths of the total interest payments, it will be considerably less of a saving.

Ruth asks…

Can I use interest from home equity loan on a schedule E if 100% of the funds went to purchasing a 2nd home?

I want to buy an investment property I found for $50K. If I take out a home equity loan and use 100% of the money borrowed to buy an investment property can I list the interest I pay on a schedule E? If I take out a little bit extra to fix the investment property up can I still deduct the interest on schedule E?

I can get a better rate on a home equity loan and save $1500 in fees instead of getting a mortgage on the investment property. Also the home equity interest would be below my allowed minimum itemized deduction if I put it on my 1040 so it wouldn’t save me any money.

So is this allowed?

Thank you!
Yes this is a duplex that will be rented out. I will never live here.

John answers:

You can use the money from a home equity loan to purchase rental property. The interest would be deductible on Schedule E, line 18, as of the date the property was placed in service and available to rent. (Some people might enter the amount on line 12).

The money has to be easily traceable, so it’s best to deposit the proceeds of the home equity loan into a checking account that is only used for your rental property. (If there is other money in this account, check Pub 535 for rules as to which funds are deemed to be spent first)

Before the “Placed in service/Available for rent” date, the interest on the loan used to purchase the property would be deducted on Schedule A, if the property qualified as a second home, and if other restrictions were met.

You can use proceeds of the home equity loan to complete repairs. If you deposit the proceeds into a checking account, you have to allocate the interest between property held for investment, and rental property interest. If you borrow $2,000 for repairs, and spend $1200 for painting in the first month, you can only deduct the interest, on Schedule E, as repairs actually paid. You can deduct the interest on the remaining $800 starting when that money is spent on repairs. Otherwise, the $800 sitting in the bank account is treated as Investment Interest Expense.

To help you in the event of an audit, you can write in “Interest on repairs” on line 18, and list the amount of interest allocated there.

For repairs and other expenses, some people would rather use a home equity line of credit instead of the proceeds of a home equity loan. The line of credit makes it easier to allocate the deductible interest. The line of credit usually has a monthly statement that itemizes, and lists your purchases by date.

If you can get a $50,000-$60,000 line of credit, then maybe you would rather use that to purchase your property. Usually, the closing costs are similar perhaps even lower than the home equity loan.

Just so you know, credit card interest is also deductible on Schedule E, as long as each purchase is for your rental property, and not for personal use.

Good Luck

Maria asks…

Will paying off my car loan two years ahead of schedule have a negative impact on my credit score?

I am looking forward to buying a house in a few years (likely 3) and have started saving for it. I have enough saved to pay off the remainder of my auto loan, but I am concerned that doing so might have a negative impact on my credit score (which in turn would impact my ability to qualify for mortages in the future). The interest rate of my savings account is almost equal to the interest rate of my car loan. Does it just make more sense to pay over time?

John answers:

Paying off your debt as fast as possible is always the most sound advice.

All lenders would rather have a debt free client when they loan out hunderds of thousands of dollars-to one who’s still paying off cars,credit card bills,etc.

Thomas asks…

Would you consolidate your debt into this loan?

If your interest rate was about 1% higher than your current mortgage, but the loan has a debt repayment plan that gets you out of debt 10 years sooner and save you over $100k in total interest? Plus, you save about $200/month in debt payment and you can apply some of it toward the principal and invest the rest.

I just don’t get why some people would say no. Maybe its because it sounds too good to be true and they don’t believe it, even though everything is printed out and a loan amortization schedule is given. Oh well, some people are just ignorant to information or they have really been brainwashed that interest rate overrides all other important data.

John answers:

Yes. This would be the best option for me because I will be able to get out of debt and save me some money that I could invest in a mutual fund.

Paul asks…

Payment to Principal at START of mortgage loan…?

I was told that making a payment to principal PRIOR to your first scheduled payment can save thousands in interest over the life of the loan and will obviously get it paid off much quicker. Something to do with being ‘ahead’ all the time on the payments. Can someone explain this more clearly and how it works. Moreover, how can I see this myself on my normal amortization schedule (I’m a visual learner)? Thanks!

John answers:

If you ever look at a loan amortization table you will see that in the first few years of a mortgage you pay very little toward principal. So actually any time in the early years you make an extra principal pay down payment it effectively puts you ahead time wise toward paying off the loan. Lets say your mortgage is $300,000 and you make a $10,000 pay down. Look at the amortization table and see timewise when your loan balance will be $290,000. You will effectively jump ahead to that point. However that only works for a fixed payment loan. On an adjustable they may just reduce you future payments to compensate for the pay down.

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