27 Apr Boosting Your First Position Line of Credit Results with Lazy Dollars – Part 2
In my last posted, we discovered I had two identical results from the two scenarios created. In short, each solution equally used income to minimize interest costs and reduce the mortgage balance. Let’s take a closer look.
Review of Our First Position Line of Credit Example
After all your bills are paid, you have a positive cash flow of $1,000. Your original mortgage balance is $240,000. Using a traditional 30-year amortization schedule at 4.09 percent your monthly mortgage payment will be $1158.28. Let’s keep it simple and assume you’ve just started paying down your loan. Your current balance is $240,000. The interest rate on the second position line of credit is 4.5 percent.
Using a small second position line of credit results in the first position line of credit being paid off three months early; however, the small balance left on the second line of credit is paid off the same time as the first position line of credit solution.
Why the Solutions are Identical
When using a first position line of credit, your income immediately reduces your mortgage balance. The lower your monthly expenses, the lower your balance. As your balance falls, the interest you are charged also falls. Scheduling your payments to the end of your line of credit’s billing cycle further reduces your interest cost. With each month’s reduction in interest, your positive cash flow increases. This makes your loan balance fall faster. Without thinking about it, you are accelerating paying down your loan.
Small Second Position Creates Low Interest Rate Loan
When integrating a second position line of credit with your income, you are creating a low interest loan. For example, after withdrawing $20,000 from the line of credit and applying it to the mortgage, your interest payment is just $55.84. This is an effective interest rate of just 3.88 percent. By month twelve, the $20,000 balance has fallen to $11,748 and the interest payment is $31.21. The effective interest rate is now only 3.19 percent. When the balance falls to less than $5,025, $16,000 is withdrawn and applied to the first position mortgage. This happens every 22nd month.
Each month, you are also making principal and interest payments to the first position line of credit. The regular plus the large payments cause the loan balance to drop faster than your first position line of credit scenario. Over time, as the first position line of credit gradually closes this gap. Why? Because as the interest payment drops your positive cash flow increases. There is no change in positive cash flow for the second position line of credit scenario.
Conclusion: You Can’t Boost Your Results
Since the results are the same, why hassle with a second position line of credit. The second position line of credit, regardless of the interest rate, will match your first position line of credit solution.
Sometimes, the obvious isn’t always obvious! CashMap enables you to take use your budget, create a first position line of credit scenario and see your savings. You can make changes in your budget and see over the next fifteen years the impact on your mortgage payoff date, mortgage interest savings and savings balance growth over.
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