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Accounting skills needed for calculating interest savings

Discussion in 'Stocks & Investments' started by FreidTaco, Nov 20, 2017.

  1. Nov 20, 2017 at 8:38 PM
    #1
    FreidTaco

    FreidTaco [OP] boost

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    So, Im looking to get a large loan, with some complicated terms. Looking to see if anyone can spread some light for interest savings and early pay off time frame.
    Trying to run all number in excel. Thanks!
     
  2. Nov 21, 2017 at 12:57 PM
    #2
    shr133

    shr133 Well-Known Member

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    Well the terms should be simple. Amount financed, APR and term should be the only factors. Any other factors could be a balloon payment and you don't want that.

    You can use any loan calculator on google and just change the term to see how much it will change the payment and how much interest it will save..
    http://www.bankrate.com/calculators/managing-debt/loan-calculator.aspx
     
  3. Nov 21, 2017 at 1:12 PM
    #3
    FreidTaco

    FreidTaco [OP] boost

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    Not quite that simple.
    $850,000
    $42,500 cash down payment
    $300,000 @1.5% for 20 years
    $507,500 @5.5% for 30 years

    How much will be saved on interest if extra $10,000 paid per year. When will it get paid off and what will the formulas be to calculate this.
     
  4. Nov 21, 2017 at 2:12 PM
    #4
    shr133

    shr133 Well-Known Member

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    Are they going to combine the loans into 1 payment or have have 2 payments?
    If 1 payment do they use an average APR and how will extra payments be treated?
    Are there any fees and are the rates fixed?
    I would think they will set up 2 separate loans and you could just do the math on the higher interest loan.
    The lower APR loan could have extra rules that could apply. The higher interest loan should be simple interest.
    They may be 2 different types of loans so know the rules each loan.

    Either way get a payment quote and ask how the loan is being set up, than you can figure out the interest payments.
    Most loans are simple interest now days so interest should be easy to figure out.
     
  5. Nov 21, 2017 at 2:18 PM
    #5
    FreidTaco

    FreidTaco [OP] boost

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    Both are fixed rate. Can not refinance. Payments made to two different entities.
     
  6. Nov 21, 2017 at 2:41 PM
    #6
    shr133

    shr133 Well-Known Member

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    So those will be 2 separate loans, so you will have to run 2 spreadsheets in excel and figure interest separate for each loan.
    If the lower APR loan has no weird rules to factor in, I would apply extra payments on the higher APR and calculate the interest savings on that loan.

    Or for cash flow pay off the smaller loan first.

    But looks like if you pay 833 extra per month, you would save $19,475 roughly in interest on the smaller loan, pay off in 12 years.
    Or around $238,017 on the larger loan, pay off in 18 years.

    The bank rate calculator has the options for extra payments and payment amortization.
    It will get you really close, each bank uses there own formula but they are all really close, usually less than a dollar per month.
    http://www.bankrate.com/calculators/mortgages/loan-calculator.aspx
     
  7. Nov 21, 2017 at 2:57 PM
    #7
    Clearwater Bill

    Clearwater Bill Sometimes when I close my eyes, I can't see.

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    It may be worth paying a CPA to help with this.

    Not that the math of your question is hard, but I'm thinking there may be additional underlying factors at play here.

    That's a lot of dough to be seeking pointers on from internet strangers.

    Also concerned that you 'cannot refinance'. That's a bit constraining.

    Sounds like you can not prepay w/o penalty either. Which would negate your savings question.
     
    Last edited: Nov 21, 2017
  8. Nov 21, 2017 at 5:45 PM
    #8
    FreidTaco

    FreidTaco [OP] boost

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    Im actually still in beginnings of negations. I am just running cash flow scenarios at various price points and input costs. I have lots of very unstable input cost variables along with unknown potential profitability.
    I think i may have been overthinking this as the larger high interest loan would get paid off first. I appreciate the help!
     
  9. Nov 21, 2017 at 7:37 PM
    #9
    shr133

    shr133 Well-Known Member

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    That's a good point, we are just looking at interest and that can be figured out and should be straight forward.
    But run it past your accountant for tax saving ect, but ultimately it usually comes down to cash flow...
     
  10. Nov 25, 2017 at 1:08 PM
    #10
    JeffreyB

    JeffreyB Well-Known Member

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    I can produce you an amortization schedule on Monday (I may go to lunch by work today actually so I could grab my laptop if I do). I may have to separate it into 2 amortization schedules and you will just have to combine the payments and whatnot for your spreadsheet. The optimal solution will be to pay the entire 10,000 toward the 5.5% portion if that is possible. If they are treated as a single payment applied to two loans proportionally we can figure that out too. So if you figure out how that works and want a few amortization schedules (one for minimum payments and one for the extra 10k in payments) let me know.

    Also based on what you have said this sounds correct. If you are not able to refinance, you are probably not able to prepay, which means that you can't throw extra at it anyway.

    Good point here as well, is this for a business? Is it for personal real estate?

    I can help where I can but keep in mind this is not advice, it is just me sharing my personal opinions and ideas.
     
    Last edited: Nov 25, 2017
  11. Nov 27, 2017 at 7:56 AM
    #11
    JeffreyB

    JeffreyB Well-Known Member

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    Do you want amortization schedules?
     
  12. Nov 28, 2017 at 6:44 AM
    #12
    FreidTaco

    FreidTaco [OP] boost

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    This is for some farm ground. If you could create some schedules that would be great.
    Sounds like larger loan will be at 5.9% fixed.
    Prepayment penalty of 1.25% of the prepayment amount in the first year. No penalty in subsequent years.
     
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  13. Nov 28, 2017 at 2:52 PM
    #13
    JeffreyB

    JeffreyB Well-Known Member

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    Attached should be

    - 300k for 20 years at 1.5% with no extra payments
    - 507,500 for 30 years at 5.9% with no extra payments
    - 507,500 for 30 years at 5.9% with an extra 10k per year
    - 507,500 for 30 years at 5.9% with an extra 10k per year starting after the first year

    It does still make mathematical sense to pre pay, but not by a whole lot.

    To add in the pre-payment penalty you will just have to tack on 1.25% to your extra payments in your spreadsheet for year one.

    I popped one for paying the minimums for a year and then paying 10k a year extra.

    Your accountant would be able to give you good advice based on the rest of your finances and tax items.

    Under the assumption that this is going on your tax return under schedule F (Farming activity), I have seen business owners take both routes. Your interest expense is tax deductible, so it effectively makes your interest rate much lower than it actually is. Because of that a lot of business owners pay minimum payments because the money is cheap. Some business owners don't like debt and will pay it off as quickly as possible, their reasoning being that saving 40 cents on a wasted dollar is still 60 wasted cents. Your accountant will be able to give you guidance on which route may work best for you.

    As usual this isn't advice, just my ideas and opinions, etc etc. I'd be happy to share more ideas and opinions though!
     

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    Last edited: Nov 28, 2017
  14. Nov 28, 2017 at 5:40 PM
    #14
    FreidTaco

    FreidTaco [OP] boost

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    Jeff, Thank you for running those numbers for me. Greatly appreciate it!

    Looks like paying extra 10k will save 262k over life of the loan. seems like a no brainer to me.
     
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  15. Nov 29, 2017 at 8:27 AM
    #15
    JeffreyB

    JeffreyB Well-Known Member

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    Any time. The other cool thing is that the 30 year loan will be paid off before the 20 year is. So you’ll be done with both in 20 years or less.
     
  16. Dec 1, 2017 at 2:17 PM
    #16
    shr133

    shr133 Well-Known Member

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    looks you got it figured out....
     
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