(i) I have an [tag]interest-only home equity loan[/tag] of $124,000 at 8% interest rate. I want to pay it off. If I repay $1,800 each month, when will I pay off the loan?

(ii) How much interest will I have paid?

(iii) Currently my interest-only payment is just over $800 a month. If I repay $1,000 principal every month, will I be better or worse off?


(i) You will pay off the entire loan in 93 months. The final repayment installment is $960.

(ii) You will have paid $42,560 interest in total.

I have set out the numbers for you under Scenario 1 in this spreadsheet. Be sure to scroll down to the bottom of Scenario 1 to see the summarized figures.

(iii) Repaying $1,000 principal every month

(a) It will not make a difference if you repay $1,800 every month

If you pay $1,800 every month, the results will be answers (i) and (ii). There will not be any changes in the results. The monthly interest will be paid off first from your $1,800 monthly installment, and then whatever amount of money left of the $1,800 is used towards repaying the principal.

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Scenario 1 shows the monthly interest and principal paid. Go back to Scenario 1, and you will see that in month 1 $827 interest is paid, while $973 principal is paid. In month 2 $820 and $980 interest and principal are paid respectively. Each month’s interest and principal paid add up to $1,800. This is how your monthly installment is apportioned between interest payment and principal payment.

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In Scenario 1 you may have already noticed that in each successive month the principal paid increases while the interest paid decreases. You can see that after month 5 the principal paid each month exceeds $1,000.

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(b) You will end up paying more interest if you stipulate $1,000 monthly principal repayment
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If you agree with your lender that you will pay $1,000 principal each month, you will repay your loan according to the [tag]loan repayment schedule[/tag] shown under Scenario 2 . You will be worse off as follows:

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(1) You will fully pay off your loan in 124 months vis-a-vis 93 months in Scenario 1. This is because you pay off the outstanding principal at a slower rate in Scenario 2, thus stretching the loan period.

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(2) Your monthly repayment installments will no longer be constant: they decrease in each successive period. You will have to pay $1,826.67 in month 1, $1,820 in month 2, $1,813.33 in month 3, and so on (see Scenario 2 “Repay” column). This may cause you some inconvenience in administering your monthly repayments.

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(3) You will have paid $9,106.67 more interest at the end of the loan period. Scroll down to the bottom of Scenario 2 to see the summarized figures.

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I am already having 2 mortgages on my house. Each month my paycheck is just sufficient to cover my expenses and financial commitments. I just want a bit of security by getting a $10k personal loan, and don’t want to get ripped off. Any suggestions?



Yes, there is such a thing as $10k personal loan that you can get. Many personal loan lenders advertise online. Some operate online through the internet, while some have storefront lending offices in local communities. You may want to check out this one:
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==> http://www.klikks.com/unsecured_personal_loan

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Can you resist the temptation?

Although you are living paycheck to paycheck each month, you do not mention that you are in cash deficit. You want the $10k personal loan just as a standby security — just in case you need some cash.
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My concern is: can you really resist the temptation of not utilizing the personal loan unnecessarily? Once you utilize the loan, you will be unable to repay it, given your monthly breakeven financial position. You will be in trouble.

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Secured or unsecured personal loan?

If you must have the personal loan, then consider whether you want a secured or unsecured one.

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[tag]Secured personal loan[/tag]

If the $10k personal loan can be secured against your house (assuming it has enough equity), you will be able to get a lower interest rate and better loan terms vis-a-vis an unsecured personal loan, because the lender perceives that his risk is greatly reduced by your collateral (ie your house).

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[tag]Unsecured personal loan[/tag]

If you opt for an unsecured personal loan, your [tag]credit score[/tag] and history are the only guarantees of repayment for the lender. In other words, your repayment is only based on your personal characteristics. Thus, the loan terms and requirements for approval will vary according to what your credit report shows.
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You may have read some lenders’ personal loan ads that say something like this: ….up to $x no [tag]home ownership[/tag] required…. above $x home ownership required.
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What does this mean? This means home ownership influences the outcome of your personal loan application. Since you own a house, you have an advantage in applying for an unsecured personal loan.
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Home ownership is generally a guarantee for the lender because it implies solvency (the ability to meet financial obligations on time) in many ways. For starters, maintaining a property is not cheap, and thus it shows the lender that you have been able to manage your finances properly. But it also implies that in case you cannot afford the monthly payments and the lender has to resort to legal means to recover his money, there are more probabilities he will be able to get enough money from your assets to recover the amount owed and any legal fees he might incur.
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—– Sidebar —–

Just because your $10k personal loan is not secured does not mean you are not risking your house. If you default on your loan repayment, the lender can take you to court to recover his money. In the worst case scenario this can lead to your house being repossessed or sold to repay the debt. Of course, in practice, you will not allow a mere $10k personal loan to cause you to lose your house!
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The best way to avoid this is by being very certain about your ability to repay the loan, and keeping in contact with the lender should problems arise. Many lenders would rather resolve disputes without resorting to legal action.

—– End of sidebar —–

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Home ownership also helps you get higher loan amounts either with secured personal loans or unsecured personal loans.

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Advantage of unsecured personal loan

Unsecured personal loans can be arranged more speedily than a secured personal loan where you may have to wait to have your collateral approved.

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Variable or fixed interest rate

Personal loans come either with a [tag]variable interest rate[/tag] or a [tag]fixed interest rate[/tag]. If you opt for a variable interest rate personal loan you can get significantly lower rates. However, you need to bear in mind that variable rates can increase suddenly due to the money market conditions and you might end up paying more than what you would have paid if you selected a fixed interest rate personal loan.
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Therefore a fixed interest rate personal loan may be better for you.

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Fixed monthly repayment

Unlike credit cards or lines of credit, your personal loan monthly repayment installments are fixed. While this helps your repayment discipline and cash flows budgeting, it also means that you must be able to make your repayment punctually without fail every month — unlike credit card debts for which you can pay only the minimum payments if you have insufficient money.
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Therefore I have to stress again that you must be very certain that you will be able to repay the personal loan throughout the loan period, since you are financially tight.

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Don’t get ripped off

(1) Shop around

You should never go with the first interest rate quote you find. Instead, seek out a few lenders and compare their offers. You may want to start here to get some free quotes and ideas.
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Naturally, you want to find the lowest interest rate, but that should not be your only deciding factor. If the lenders you have sought out offer similar interest rates, you need to read the fine print of the offers to see what other features are offered with these loans. When you do this, you may discover some unacceptable terms in some of the offers.

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(2) Beware of hidden costs

As you dig deeper, read the fine prints and ask questions, you may find out that some lenders include extra fees or misleading terms in their offers. They may include [tag]arrangement fees[/tag] and [tag]early repayment fees[/tag] (which I loathe and never accept) in their loan agreement. These fees should be reflected in their [tag]APR[/tag] ([tag]annual percentage rate[/tag]).
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APR measures the lenders’ real profit. Their real profit is your real cost. Put simply, APR includes the lenders’ interest charges and all other charges and fees they add to your loan.
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Ask them to reveal the fees and costs they include in their APR calculation. The more charges they levy on you, the higher their APR. Ask them to drop the fees you do not accept. In short, you want a low APR.

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(3) There’s no free lunch

If you successfully negotiate with the lender to gain an advantage, do not hastily think that you have won and got a good deal. Lenders have their profit objectives. Your lender may appear to give you a concession, but he may modify the loan structure or the terms of the agreement to gain back an advantage so as to preserve his profit objective. Therefore, again, study the revised terms and the final loan agreement carefully.

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(4) Know your credit score

It is advisable that you obtain your [tag]credit report[/tag] before you apply for your personal loan. Knowing your credit score can give you the confidence to negotiate a lower interest rate. Obtaining the credit report also gives you the ability to correct any misinformation before applying for your personal financing.

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Summary

(1) Do you really need the $10k personal loan?
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(2) Will you be able to repay the loan?
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(3) Which suits you better, a secured personal loan or unsecured personal loan. A secured personal loan is cheaper than an unsecured personal loan, but will take longer to get approved.
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(4) Variable interest rate or fixed interest rate? It is advisable that you go for fixed interest rate.
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(5) Shop around. Compare offers.
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(6) Evaluate both interest rates and APRs. Seek a low interest rate AND a low APR.
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(7) Interest rates and APRs are not the only deciding factors. Study the loan agreement and fine print to make sure there are no unfavorable terms.
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(8) Obtain your credit report before you apply for the loan.

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Oh, one more point: your personal loan interest charges are not eligible for [tag]tax deduction[/tag].
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Why?
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The IRS says so.

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My first mortgage balance is $190k at 4%pa. I have a home equity line of $170k that I have fully utilized. I am also a $30k credit card debt.

Should I refinance my home equity loan to consolidate my credit card debt?

Obviously it is advantageous for you to consolidate your credit card debt because:
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(a) you will save interest because you will be using the cheaper home equity loan to replace your more expensive credit card loan, and
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(b) having your credit card debt paid off will result in a lower credit card utilization rate which in turn will improve your credit score.

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Financing option
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How are you going to raise the $30k to clear your credit card debt?
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(1) One option is to increase your home equity line by $30k, assuming that you still have available home equity to do so. This will bring your total home equity debt up to $200k.
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(2) The other option is to ask your first mortgage lender to lend you another $200k that you will then use to pay off both your home equity loan and credit card debt. This is advantageous because first mortgage is usually cheaper than second home loan such as your home equity loan.

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Points to note
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(A) Your current situation has a tax disadvantage here. While you can deduct your home equity loan interest for tax purposes, your eligible home equity loan is limited to a maximum of $100k only. The interest you pay on the remaining $70k of your home equity loan is not eligible for tax deduction. Financing option (1) stated above will not increase your tax deduction for the loan interest.
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If you choose financing option (2) to borrow the $200k (ie $170k + $30k) from your first mortgage lender, you will increase your interest savings as mortgage interest rates are lower than home equity loan rates. Of this $200k new first mortgage, interest on $100k is still eligible for tax deduction.
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It does not matter what the loan is called, either first mortgage or home equity loan. For the purposes of tax deduction for mortgage interest, as long as the loan secured on your home is not used for buying or improving your home, the loan amount — whose interest is eligible for tax deduction — is limited to a maximum of $100k only.

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(B) You should ascertain the appraised value of your home. If your total borrowings exceed 80% of your home’s appraised value, you will have to buy private mortgage insurance (PMI) to protect your lender against your default. PMI will increase your loan costs. Your total borrowings will be $390k (ie $190k + $170k + $30k new loan), and so your home’s appraised value has to be at least $488k to avoid having to pay PMI ($390k � $488k x 100% = 80%).

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The bottom line is that you must work out the numbers (eg the interest charges, closing costs, monthly repayment amount, total loan interest over the loan period, APR, etc) under each possible option to determine the best choice before you make your decision.
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