Steve,
You lost me there. I dont understand what you are saying in that post weather I am not on that level or what. But if i take you 11.44% presumed need the 16,000 would come out to 487,033.43. That is without the added in extra payment that is just the 16,000 for the down payment. You say that is break even point which I do not understand maybe my math is to simple and you can maybe educate me?

Total Interest on 321,600 @3.75% over 30 years =214,576.80
Total Payments on 321,600@3.75% over 30 years = 536,176.80

Added in the extra 27,720 that costs for PMI and extra interest compared to the 10 % down option.

The total cost with interest, PMI and excluding principle payments = 242,296.80

242,296.80<487,033.43.

Now if you took the total cost of the loan it would be 536,176.80.
I guess I am confused to see how we would have to achieve 11.44% to break even can you maybe explain a little better in la-mans terms.

Coaster,
I would do the middle of the road option, the problem is that I make to much and can not contribute to a Traditional IRA. Roth IRA would be at a reduced contribution level also. That is the reason I was looking at a taxable account. 403b is also maxed out yearly so is not an option either.

Sun Feb 24, 2013 8:21 am

smk Preferred Member

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kellen, you will start to get to the same place via coaster's calculations if you do them correctly. however, there is a fundamental flaw in your thinking. $1 today does not equal $1 in say 10 years. they cannot buy the same things. also, if you invest $1 today at a certain riskless rate, you will get something more than $1 in 10 years. this concept is called the time value of money. you can understand the math better here: http://www.tvmcalcs.com/tvm/tvm_intro . this should explain how you can reduce a series of payments over time to one amount today called the net present value (NPV).

the key point you are missing is that each payment you make on the loan and pmi needs to be deducted from the 16k extra loan amount WHEN YOU MAKE the payments and not at the end of the period. you will then no longer be earning money on those amounts.

the internal rate of return calculation (IRR) is the easiest way to solve this problem and excel will do it for you. just list the incremental changes in payments at each moment in time (cash in from extra loan and all the extra payments over the life). then use =irr(guess, values) to come up with the monthly return numbers. this calculation is an iterative process that sets the npv of what you spend in payments equal to what you receive in cash from the loan. it is therefore the breakeven return that you need to beat to make money. you can guess whatever you want, but 1% is fine. the values are the different cash flows. then you just need to annualize the number from monthly.

my example showed the breakeven is 11.44%. if coaster's approach is correct, you will find you lose money until you reach 11.44%.

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The Excel function makes all the calculations easy and spits out the result; but I think it's to benefit of better understanding of what's happening with the numbers to do it in spreadsheet "longhand" with a single column and a single calculation for each assumption and each input; then you understand better of how the assumptions and the inputs affect the result by "what-iffing" each input and each calculation. If the calculation going from one column to the next is nothing more complex than plus, minus, times, divide, then it's been reduced to it's simplest form.

~Tim~

Sun Feb 24, 2013 6:30 pm

smk Preferred Member

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that can be quite helpful. i think that is what you were doing before. but when you have a lot of moving parts, it is a good idea to do the simple form as well just to check to make sure you didn't steer off course...

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... and just remembered (at least I think I did; it's been years), there just may be an exponent in there somewhere ....

gah!!

... got to get back to basics again ...

(sometime, maybe)

<sigh>

~Tim~

Mon Feb 25, 2013 3:59 am

coaster Senior Advisor

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... and that's the trouble with building models; if the model works and you're happy with its results, you can forget what you did to build it ...

~Tim~

Mon Feb 25, 2013 4:01 am

smk Preferred Member

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the irr calc takes care of most of the exponents. the only thing you have to worry about is annualizing it. you should use (1+r)^12 to annualize from monthly, but if you just multiply r x 12 it is not too bad.

the problem with the way you were going about it is they were going to make mistakes. you need to consider where the interest payments were coming from and record the impact as well. you also can't simply add each monthly interest payment to get a total expense paid out. that kind of stuff was going to fall through the cracks. then you get an answer that tells you to do something you really shouldn't do.

if you show each change in cash flow and then sum them up for each month, you can see all of the steps. then you just subtract to show the differences and run an irr for a breakeven. this is less likely to cause errors and you can still see each step...

A mortgage, whatever form it takes, can often be one of the biggest expenses of a person's life. Secured loans are available for business premises and residential loans, and often involve repayments over many years.

Thu Apr 11, 2013 10:13 am

elwinmerle New Member

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As you get ready to purchase your first home, make sure you've made a housing budget and applied for a mortgage, so you'll know how much you can afford to spend.