27 Apr Picture Your Line of Credit – Part 2
Let’s continue looking at the picture of your line of credit that we created. Let’s recap the basic information.
You deposit $5,025 in the bank each month, your monthly expenses total $4,025 (This includes your mortgage payment of $1,364.40) and you have a $15,000 line of credit that charges an interest rate of 4.5 percent.
A Picture is Worth a Thousand Words
We’ve all heard the saying, ‘a picture is worth a thousand words’. Click on the following link:
Our Line of Credit Picture. If you have problems, copy and paste in your browser: http://sdrv.ms/18x1xVb.
In my last post, we saw that we can use a line of credit the same way we use our checking account.
Three Ways to Withdraw Dollars
When withdrawals are made from your line of credit, your financial institution will allow this to be done using any one or all of the following methods. For each option, an individual bank’s policy varies widely. There are banks and credit unions that provide all three alternatives at no cost. Shop around and compare!
1. Line of Credit Checks: Your financial institution provides you with checks. You use these checks to make withdrawals. Like a regular checking account, balance your line of credit at the end of each month.
2. Regular Check with Overdraft Protection: Continue writing checks, as you would normally do. With overdraft protection, since you have moved all your accessible dollars to the line of credit, the bank withdraws the necessary funds from the line of credit to your checking account.
3. On-line Bill Payment: Frequently on-line services are the most flexible and inexpensive. You set up the date for payments and identify the account from which the funds with be withdrawn. Once you set-up the bills you will regularly pay, the process can be automated. In Canada, this service is frequently associated with your credit card. In the U.S., the service may be integrated with either the line of credit or your regular checking account.
Mortgage Interest Savings Calculation
Let’s return to our example, near the bottom of the page in cell ‘F67’ marked in orange, the average daily balance has been calculated ($1,168). The interest owed (cell ‘F71’) is marked in dark blue totals $4.38.
Now, let’s see how the interest savings are calculated. Move your cursor to the right until you can see columns ‘O’ to ‘AB’.
In columns ‘O’ to ‘R’, the loan payment scheduled is listed month by month.
In row 5 beginning with column ‘S’ and moving to the right to column ‘Z’, you’ll see how the additional $5,200 payment was applied to the mortgage. In cell ‘Z’5 the new mortgage balance has dropped to $227,563. Cell ‘R22’ is in blue. This means that by making the $5,200 payment, you missed making the scheduled interest payments beginning with cell ‘P6’ and ending at ‘P22’. This totals $17,947! (This is totaled in column AB). For just $4.38, you have saved yourself $17,947.
Pretty cool and very simple!
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