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On January 17 2022 08:59 micronesia wrote: My math doesn't take into account inflation, time value of money, or strategies to make extra payments beyond the first month
If you ignore every reason the correct answer is correct then it becomes wrong doesn't seem like a valuable use of your time.
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United States24342 Posts
On January 17 2022 09:22 Blitzkrieg0 wrote:Show nested quote +On January 17 2022 08:59 micronesia wrote: My math doesn't take into account inflation, time value of money, or strategies to make extra payments beyond the first month If you ignore every reason the correct answer is correct then it becomes wrong doesn't seem like a valuable use of your time. If my math is correct then my next step will be to pick one of those things and see how it changes the answer. Once I know how to do that, I can adjust the size, payment terms, and interest rates of the two loans to see if I can find a scenario where paying a bit to the lower interest rate is still beneficial despite taking time value of money (or inflation) into account. I don't yet have the foundation to do that so I'm starting with the simpler case, recognizing it's not as useful for applying to real life.
edit: Some people elsewhere told me my math was wrong so I wanted to get an unbiased second opinion or three before diving deeper into this. Fortunately I'm not in any type of a debt crisis right now and I am pursuing this mostly academically. I might be in a somewhat similar situation in the future so I'd like to understand the considerations first.
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United Kingdom13774 Posts
On January 17 2022 08:59 micronesia wrote:Show nested quote +On January 17 2022 08:30 LegalLord wrote: The conventional answer is the correct answer. The payment duration isn't a fundamental property of the interest rate per se - it's just what happens when you set your payment to the exact value needed so that the loan, plus all accumulated interest, is retired exactly at the end of that duration. It doesn't matter how long the loan is notionally supposed to be in duration because loan duration for a given principal and interest rate is going to be given by what payments you made. This all made perfect sense to me but I chose to define the loan by duration rather than monthly payment amount. You could of course define it using either number and the other would be calculated for you up front. Show nested quote +What you really have to keep in mind is that in loan A, the interest rate means that every dollar you borrowed will add 4% interest per year on top of the outstanding principal, whereas for loan B every dollar will add 6% per year. So if you reduce the B loan's principal by $200, that's going to have a larger effect in reducing your principal. So, as the conventional wisdom says, you would be best off paying more on B. Isn't there a competing effect where the larger loan's interest is going to compound for much longer, though (if we disregard time value of money for now)? I mean, disregarding time value of money is essentially saying the same thing as disregarding the answer. TVM is the basis by which you calculate the relative value of each payment. Fundamentally, money you borrow has a cost (in the form of an interest rate), you set one of payment or duration, and the other of payment/duration is the result. At any point in time, retiring an obligation with the highest cost is the optimal strategy.
Perhaps the most useful way to look at the problem is to see where you land after 10 years. You start at time 0 (today) and have taken out the loans A and B. You plan to make minimum payments to pay off A in 30 years and B in 10 years, with the exception of an extra $200 to be paid towards a principal right now.
At the end of the 10 year point, that $200 as applied to A would have reduced $296 in principal plus accumulated interest ($200 for 10 years at 4%), and B would have reduced $358 in the same. Clear advantage to B, but at that point B has been repaid so it will no longer be accumulating more interest. However, your last payment into B would have been reduced by that $358, which you can choose to put into payments towards the A loan. That's money that your last B payment would not have been reduced by if you had not put that $200 in at the start, so it's not extra money being introduced into the loan repayment. And it's pretty clear that $358 will compound into a larger loan savings than $296 over the 20 years that follow.
Were you to choose to take that $358 payment reduction out of the system and not apply it towards A, that's taking money that would have otherwise been committed to loan payments that you choose to use for a different purpose instead. Yes, that might happen, but you might also choose to refinance A or something. Ultimately, that $200 would do more good in B for 10 years followed by A for 20 than in A for the whole 30 years. Which goes back to "the obvious answer is the correct one."
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United States24342 Posts
On January 17 2022 10:26 LegalLord wrote:Show nested quote +On January 17 2022 08:59 micronesia wrote:On January 17 2022 08:30 LegalLord wrote: The conventional answer is the correct answer. The payment duration isn't a fundamental property of the interest rate per se - it's just what happens when you set your payment to the exact value needed so that the loan, plus all accumulated interest, is retired exactly at the end of that duration. It doesn't matter how long the loan is notionally supposed to be in duration because loan duration for a given principal and interest rate is going to be given by what payments you made. This all made perfect sense to me but I chose to define the loan by duration rather than monthly payment amount. You could of course define it using either number and the other would be calculated for you up front. What you really have to keep in mind is that in loan A, the interest rate means that every dollar you borrowed will add 4% interest per year on top of the outstanding principal, whereas for loan B every dollar will add 6% per year. So if you reduce the B loan's principal by $200, that's going to have a larger effect in reducing your principal. So, as the conventional wisdom says, you would be best off paying more on B. Isn't there a competing effect where the larger loan's interest is going to compound for much longer, though (if we disregard time value of money for now)? I mean, disregarding time value of money is essentially saying the same thing as disregarding the answer. TVM is the basis by which you calculate the relative value of each payment. Fundamentally, money you borrow has a cost (in the form of an interest rate), you set one of payment or duration, and the other of payment/duration is the result. At any point in time, retiring an obligation with the highest cost is the optimal strategy. Perhaps the most useful way to look at the problem is to see where you land after 10 years. You start at time 0 (today) and have taken out the loans A and B. You plan to make minimum payments to pay off A in 30 years and B in 10 years, with the exception of an extra $200 to be paid towards a principal right now. At the end of the 10 year point, that $200 as applied to A would have reduced $296 in principal plus accumulated interest (10 years at 4%), and B would have reduced $358 in the same. Clear advantage to B, but at that point B has been repaid so it will no longer be accumulating more interest. However, your last payment into B would have been reduced by that $358, which you can choose to put into payments towards the A loan. That's money that your last B payment would not have been reduced by if you had not put that $200 in at the start, so it's not extra money being introduced into the loan repayment. And it's pretty clear that $358 will compound into a larger loan savings than $296 over the 20 years that follow. Were you to choose to take that $358 payment reduction out of the system and not apply it towards A, that's taking money that would have otherwise been committed to loan payments that you choose to use for a different purpose instead. Yes, that might happen, but you might also choose to refinance A or something. Ultimately, that $200 would do more good in B for 10 years followed by A for 20 than in A for the whole 30 years. Which goes back to "the obvious answer is the correct one." Thanks for explaining that out in detail. I had come to mostly similar conclusions playing around with the spreadsheets myself. Adding $200 to one of the loans at the beginning and then doing nothing else is not a realistic strategy. A real strategy looks at the downstream effects of what else you can do, and when you do that, investing in the higher interest loan is better. It took a fair amount of thinking for me to more or less figure this out, and your explanation seems to have sealed the deal.
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United States40776 Posts
On January 17 2022 07:21 micronesia wrote: I have a finance question I'm not 100% sure of the best way to answer related to paying off loans. I figure I'll share it with the brain trust.
I just took out two loans: a 30-year loan of 300k with 4% interest and a 10-year loan of 100k with 6% interest. For the first payment, I want to make an extra one-time $200 payment towards principle. If my ultimate goal is to save money, should I put that payment towards the 300k loan or the 100k loan?
I think conventional wisdom is to put the payment towards the higher-interest loan. However, if you put the extra payment towards the 30-year loan, you are saving a lot on compound interest. Which is the smarter thing to do, and more importantly, why?
I ask because I may be in this situation in the future, although I made up the numbers to keep it simple. The answer might change depending on the exact numbers chosen though.
edit: I think the answer is different than the answer to the question of which loan to attack first to get debt free in general Is this a serious question?
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On January 17 2022 07:21 micronesia wrote: I have a finance question I'm not 100% sure of the best way to answer related to paying off loans. I figure I'll share it with the brain trust.
I just took out two loans: a 30-year loan of 300k with 4% interest and a 10-year loan of 100k with 6% interest. For the first payment, I want to make an extra one-time $200 payment towards principle. If my ultimate goal is to save money, should I put that payment towards the 300k loan or the 100k loan?
I think conventional wisdom is to put the payment towards the higher-interest loan. However, if you put the extra payment towards the 30-year loan, you are saving a lot on compound interest. Which is the smarter thing to do, and more importantly, why?
I ask because I may be in this situation in the future, although I made up the numbers to keep it simple. The answer might change depending on the exact numbers chosen though.
edit: I think the answer is different than the answer to the question of which loan to attack first to get debt free in general
Others have directly answered which loan they think technically saves you a bit more money, but I'll just throw in the suggestion that - while paying off the principal is always preferable - I don't really think it matters which loan you pick, given how negligible $200 is compared to $300,000 and $100,000. If you were going to pay off $20,000 up front, it would be a more worthwhile question, but $200 is a drop in the bucket for either one.
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United States24342 Posts
On January 17 2022 12:26 KwarK wrote:Show nested quote +On January 17 2022 07:21 micronesia wrote: I have a finance question I'm not 100% sure of the best way to answer related to paying off loans. I figure I'll share it with the brain trust.
I just took out two loans: a 30-year loan of 300k with 4% interest and a 10-year loan of 100k with 6% interest. For the first payment, I want to make an extra one-time $200 payment towards principle. If my ultimate goal is to save money, should I put that payment towards the 300k loan or the 100k loan?
I think conventional wisdom is to put the payment towards the higher-interest loan. However, if you put the extra payment towards the 30-year loan, you are saving a lot on compound interest. Which is the smarter thing to do, and more importantly, why?
I ask because I may be in this situation in the future, although I made up the numbers to keep it simple. The answer might change depending on the exact numbers chosen though.
edit: I think the answer is different than the answer to the question of which loan to attack first to get debt free in general Is this a serious question? No I didn't actually take out the loans. Yes, I was wondering if my math (discussed in a later post) was correct or not. No, my math being correct is clearly not "useful" for the reasons subsequently discussed. I was wondering why my math was contrary to conventional wisdom but then figured it out by reading some articles and figuring out what assumptions they were making that I was not.
On January 17 2022 12:41 DarkPlasmaBall wrote:Show nested quote +On January 17 2022 07:21 micronesia wrote: I have a finance question I'm not 100% sure of the best way to answer related to paying off loans. I figure I'll share it with the brain trust.
I just took out two loans: a 30-year loan of 300k with 4% interest and a 10-year loan of 100k with 6% interest. For the first payment, I want to make an extra one-time $200 payment towards principle. If my ultimate goal is to save money, should I put that payment towards the 300k loan or the 100k loan?
I think conventional wisdom is to put the payment towards the higher-interest loan. However, if you put the extra payment towards the 30-year loan, you are saving a lot on compound interest. Which is the smarter thing to do, and more importantly, why?
I ask because I may be in this situation in the future, although I made up the numbers to keep it simple. The answer might change depending on the exact numbers chosen though.
edit: I think the answer is different than the answer to the question of which loan to attack first to get debt free in general Others have directly answered which loan they think technically saves you a bit more money, but I'll just throw in the suggestion that - while paying off the principal is always preferable - I don't really think it matters which loan you pick, given how negligible $200 is compared to $300,000 and $100,000. If you were going to pay off $20,000 up front, it would be a more worthwhile question, but $200 is a drop in the bucket for either one. True. The focus was really on saying "which loan benefits from the first dollar" because other factors come in to play when you start putting in large down payments.
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I'm curious about what other people somewhere said that suggests there's a mistake in the math.
Between the lines this reads as if you're escogitating ways to make money by taking on debt.
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United States40776 Posts
On January 17 2022 12:42 micronesia wrote:Show nested quote +On January 17 2022 12:26 KwarK wrote:On January 17 2022 07:21 micronesia wrote: I have a finance question I'm not 100% sure of the best way to answer related to paying off loans. I figure I'll share it with the brain trust.
I just took out two loans: a 30-year loan of 300k with 4% interest and a 10-year loan of 100k with 6% interest. For the first payment, I want to make an extra one-time $200 payment towards principle. If my ultimate goal is to save money, should I put that payment towards the 300k loan or the 100k loan?
I think conventional wisdom is to put the payment towards the higher-interest loan. However, if you put the extra payment towards the 30-year loan, you are saving a lot on compound interest. Which is the smarter thing to do, and more importantly, why?
I ask because I may be in this situation in the future, although I made up the numbers to keep it simple. The answer might change depending on the exact numbers chosen though.
edit: I think the answer is different than the answer to the question of which loan to attack first to get debt free in general Is this a serious question? No I didn't actually take out the loans. Yes, I was wondering if my math (discussed in a later post) was correct or not. No, my math being correct is clearly not "useful" for the reasons subsequently discussed. I was wondering why my math was contrary to conventional wisdom but then figured it out by reading some articles and figuring out what assumptions they were making that I was not. Every additional dollar of principal paid down saves you the interest on that dollar for the period. So the question was whether it was better to save $12 or $8 each period. $12 is better because $12 > $8.
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United States24342 Posts
On January 17 2022 13:32 Vivax wrote: I'm curious about what other people somewhere said that suggests there's a mistake in the math.
Between the lines this reads as if you're escogitating ways to make money by taking on debt. I didn't get any useful refutation of the math. I don't think anyone is looking to make money by taking on this debt.
On January 17 2022 13:58 KwarK wrote:Show nested quote +On January 17 2022 12:42 micronesia wrote:On January 17 2022 12:26 KwarK wrote:On January 17 2022 07:21 micronesia wrote: I have a finance question I'm not 100% sure of the best way to answer related to paying off loans. I figure I'll share it with the brain trust.
I just took out two loans: a 30-year loan of 300k with 4% interest and a 10-year loan of 100k with 6% interest. For the first payment, I want to make an extra one-time $200 payment towards principle. If my ultimate goal is to save money, should I put that payment towards the 300k loan or the 100k loan?
I think conventional wisdom is to put the payment towards the higher-interest loan. However, if you put the extra payment towards the 30-year loan, you are saving a lot on compound interest. Which is the smarter thing to do, and more importantly, why?
I ask because I may be in this situation in the future, although I made up the numbers to keep it simple. The answer might change depending on the exact numbers chosen though.
edit: I think the answer is different than the answer to the question of which loan to attack first to get debt free in general Is this a serious question? No I didn't actually take out the loans. Yes, I was wondering if my math (discussed in a later post) was correct or not. No, my math being correct is clearly not "useful" for the reasons subsequently discussed. I was wondering why my math was contrary to conventional wisdom but then figured it out by reading some articles and figuring out what assumptions they were making that I was not. Every additional dollar of principal paid down saves you the interest on that dollar for the period. So the question was whether it was better to save $12 or $8 each period. $12 is better because $12 > $8. After 1 year, you have saved more if you put extra money into the 6% loan for the reason you provided. However, that was not what I was asking (I was asking, " If my ultimate goal is to save money..."). I think the way to explain it is that the $8 is saved more times than the $12 and so the total savings after all loans are paid off is greater. LegalLord walked through this in some detail. The distinction isn't very important because of the time value of money aspects which were also discussed above.
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United Kingdom13774 Posts
On January 17 2022 12:41 DarkPlasmaBall wrote:Show nested quote +On January 17 2022 07:21 micronesia wrote: I have a finance question I'm not 100% sure of the best way to answer related to paying off loans. I figure I'll share it with the brain trust.
I just took out two loans: a 30-year loan of 300k with 4% interest and a 10-year loan of 100k with 6% interest. For the first payment, I want to make an extra one-time $200 payment towards principle. If my ultimate goal is to save money, should I put that payment towards the 300k loan or the 100k loan?
I think conventional wisdom is to put the payment towards the higher-interest loan. However, if you put the extra payment towards the 30-year loan, you are saving a lot on compound interest. Which is the smarter thing to do, and more importantly, why?
I ask because I may be in this situation in the future, although I made up the numbers to keep it simple. The answer might change depending on the exact numbers chosen though.
edit: I think the answer is different than the answer to the question of which loan to attack first to get debt free in general Others have directly answered which loan they think technically saves you a bit more money, but I'll just throw in the suggestion that - while paying off the principal is always preferable - I don't really think it matters which loan you pick, given how negligible $200 is compared to $300,000 and $100,000. If you were going to pay off $20,000 up front, it would be a more worthwhile question, but $200 is a drop in the bucket for either one. I assumed it as interesting from a theoretical viewpoint, where $200 represented a nominal sum of money to try to understand a concept. And although the theory behind TVM and how interest plays out is a bit more complex than those repayment calculators would lead you to believe, the answer is always the same: pay the maximum amount of money towards the most expensive borrowings, and the minimum on everything else, because this will give you the optimal result.
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On January 17 2022 08:59 micronesia wrote:Show nested quote +On January 17 2022 08:05 Blitzkrieg0 wrote: Paying the higher interest loan will always save you the most money. Not paying interest 30 years from now at 4% is worthless compared to paying less at 6% today. This is just basic time value of money. When I thought about this I realized you don't derive any realized benefit until the final month of the loan (assuming you don't sell the house/etc early). An extra early payment will either reduce the size of the final payment (by an amount greater than the extra payment) or will allow the loan to end in an earlier month entirely. In my example, attacking the smaller but higher interest rate loan will derive a benefit in a much earlier year (more valuable) than attacking the larger loan with an extra up-front payment. The part where I'm struggling is to determine if time value necessarily overwhelms any other competing benefits. I'll show a bit of math further down. Show nested quote +On January 17 2022 08:30 LegalLord wrote: The conventional answer is the correct answer. The payment duration isn't a fundamental property of the interest rate per se - it's just what happens when you set your payment to the exact value needed so that the loan, plus all accumulated interest, is retired exactly at the end of that duration. It doesn't matter how long the loan is notionally supposed to be in duration because loan duration for a given principal and interest rate is going to be given by what payments you made. This all made perfect sense to me but I chose to define the loan by duration rather than monthly payment amount. You could of course define it using either number and the other would be calculated for you up front. Show nested quote +What you really have to keep in mind is that in loan A, the interest rate means that every dollar you borrowed will add 4% interest per year on top of the outstanding principal, whereas for loan B every dollar will add 6% per year. So if you reduce the B loan's principal by $200, that's going to have a larger effect in reducing your principal. So, as the conventional wisdom says, you would be best off paying more on B. Isn't there a competing effect where the larger loan's interest is going to compound for much longer, though (if we disregard time value of money for now)? Show nested quote +On January 17 2022 08:32 Vivax wrote: Played around a bit using euler. For the 100k loan I got a result of 179084 bucks. The 79084 would be what the bank got from your interest payment after 10 years if I didn't screw up the calculation.
For your question you'd subtract 200 from each loan, recalculate it with the same method and look at the difference.
First you calculate the interest factor q: (1+(interest%/100))^years
Then you do: Loan amount * q
It's an equation for calculating the returns on an investment. In this case your loan is the banks investment.
That is, on yearly interest payments. For comparison, here is my math: If I pay off the 300k loan normally, I pay 215,607 in interest by the end. If I cut the principle by 200 at the beginning, I pay 215,465 in interest. By injecting 200 at the beginning, I saved 142 over the life of the loan. If I pay off the 100k loan normally, I pay 33,224 in interest by the end. If I cut the principle by 200 at the beginning, I pay 33,158 in interest. By injecting 200 at the beginning, I saved 66 over the life of the loan. This is the calculator I was using: https://www.bankrate.com/calculators/home-equity/additional-mortgage-payment-calculator.aspx (I kept "additional principle payment" 0 for this experiment). My math doesn't take into account inflation, time value of money, or strategies to make extra payments beyond the first month. Is my math wrong somehow? It seems to show that, everything else being equal, you are better off pumping a bit of extra $$ into the 300k loan if your sole goal is to reduce total interest paid across all loans.
The problem is that you ignore what happens after 10 years. If you put the 200$ into the 100k loan (A), you have 266$ on hand after 10 years.
If you put the 200$ into the 30k loan, you have 342$ after 30 years (B)
If you are in scenario A and waste these 266$ on ice cream, you would have been better to put the 200$ in the 30k loan. However, if you put the 266$ that got free after 10 years into the 300k loan at that point, the situation should shift.
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So my ATVI gains reached 30%. Normally I would sell and never look back. But since it was Microsoft that acquired them I’m compelled to hold. I really feel like they could do new shit with their RTS IP since they did a great job sparking life into AOE again. Eh who knows.
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30% gap up ... dunno about that. Can it go higher? Sure, but it can be a bait for people to put money and use that liquidity to exit. I'd bet on the latter for a short term play. Long term, its anyone's guess. I'd sell if I were you, or at the very least take some profits. Pay yourself, unrealized profit isnt profit.
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wow shorting whatever this guy recommends must be a legit investment strategy
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United Kingdom13774 Posts
Market had the worst week since the start of the pandemic. Enough to cause the Fed to forget about inflation for another several months and just let consumer prices run wild, maybe? Just long enough for stock prices to recover.
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Anyone ever trade Options on Etrade? I dabbled a little bit buying a few calls on MEME stocks during the BANG craze that expired worthless. Finally had a hit buying a DASH Jan 21 '22 $210 Put about 4-5 months ago. I've read on etrade that any options that expire in the money are automatically exercised so I just left it. But my account value is showing as $9,300 less than it was yesterday afternoon which is last price of that Put option. I'm hoping this is just a glitch and it will be corrected on Monday? Or did I just piss away 9 grand?
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