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Old 01-16-2015, 11:54 AM
 
12,707 posts, read 9,981,349 times
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Quote:
Originally Posted by TheOverdog View Post
I still think you need to refine your thinking a lot. That seems like a huge strawman. Which repairs are you comparing? At what gas prices? These are variables, not full equations.
The point is there without having to include every last detail. This is not a straw man.

Quote:
Originally Posted by TheOverdog View Post
Stretching out loans does nothing to make people upside down.
What are you smoking? Of course it does. When you stretch a loan out, you slow down the rate at which the principal is paid down, thus at any given time you owe more than you would at the same point in a shorter loan, ceteris paribus. As a result of owing more, you are more likely to be upside down, since the vehicle's value is the same in either case.

Quote:
Originally Posted by TheOverdog View Post
Asset price movements are irrelevant to current loan balance, assuming non-interest only. I could find a half dozen articles about businesses having liquidity issues, so having an army of accountants does not solve liquidity problems. In every one of the those cases, I'm pretty sure they are able to classify income vs expense correctly from an accounting perspective.
You're saying like 3 completely different things here, not sure your point but ok.
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Old 01-18-2015, 01:44 AM
 
Location: Southern California
4,428 posts, read 5,303,964 times
Reputation: 2187
You title is deceiving since it is more about your point of building wealth than defining expense.

Quote:
Originally Posted by ncole1 View Post
I have tried to explain over and over why this thinking is flawed, and it simply refuses to die. It is a simple exercise in finance to show that your ending wealth is independent of monthly payment amount, but instead affected by user cost (i.e. interest plus depreciation plus opportunity cost of equity).

Maybe you should rethink your approach or give it up. They aren't thinking, talking, planning, long term wealth, they want some new wheels. If someone walks into McDonalds, they are there for a burger, not looking how if they save their $4 now, it can be $8 if they put it in the markets.


Similarly, on these forums and elsewhere people looking at rental property view the cost of the property itself in terms of their monthly payment and then calculate a cash flow. Strictly speaking of course, this is irrational, unless liquidity is tight. This 'monthly payment mentality' is irrational, and this is easy to see if you do a simple calculation of ending wealth.

I bought a property for $200,000 and it cash flows, $800 goes to interest and $300 goes to principal, the property value goes down, from $200,000 to $100,000, my cash flow remains the same, my $300 in principal is not building equity, it is an expense regardless of the equity and long term wealth. The moneys used in the mortgage was spent to acquire the property. Liquidity should ALWAYS be consider tight.

Since you know THEIR thinking is irrational, you'd be more irrational thinking you can change the opinion of a irrational person, so stop trying, you are right, you'll be the 25% not living paycheck to paycheck. Most people on these boards aren't opened minded. They are know it alls


In any of the cases, absent liquidity problems or crunches, there is no situation in which you get a better answer treating principal payment as an expense than you do if you simply see it as it is - an internal transfer that is incidentally also required.
An expense is different than a Profit and Loss which equates to value.

It is an internal transfer if you can transfer it back, which you can't easily do. If you are obligated to pay it, then it is a monthly expense, we saw what happens with Interest Only loans, you will have to eventually pay the piper and there might be a credit crunch when you do.

If you have a $10,000 auto loan at 3% and have paid down $5,000. It'd be hard and more expensive to tap that equity, is it liquid no, can you get a title loan at over 15%, yea, I'd call this a liquidity problem. Liquidity should be consider for each asset individually. What if you don't have a job, how liquid is your "previously paid principal", it is an expense that you may not be able to get back to cover other future liabilities.


Quote:
Originally Posted by jw2 View Post
Another thread running amok.

I believe nclole's comment that a principal repayment is not an expense comes from this

Full thread
Lovehound feels the entire payment is an expense. Well, not according to the IRS

In this context, ncole is right, the principal repayment is just a reduction of a liability. If you have a proper balance sheet, the principal repayment doesn't alter the net worth,, just moves it from one category to another.

I agree with ncole's statement because I think in terms of profit/loss and taxes.

However, the word 'expense' has different contexts, such as how much does something cost. I do not believe ncole meant it in this context
Quote:
Originally Posted by Lowexpectations View Post
With the exception of liquidity right? Which is the largest issue for most people and family budgets, thusly makes this entirely rediculous
CNN reports 75% of Americans are living paycheck to paycheck.


Lovehound's post was targeted at me, I was really hoping he found a legal way to write off principal, but sadly no.

The principal payment is a teeth in the gear of the machine that creates profit. Take away the teeth the machine doesn't work.

I'll be the first in line when principal is not treated by underwriters as an expense, I'll gladly increase my debt load 30%
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Old 01-18-2015, 02:13 AM
 
Location: Southern California
4,428 posts, read 5,303,964 times
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As far as the car scenario, 10 year old car originally purchase for $25,000 current value $13,000, total maintenance $5000. Total cost $30,000, depreciation $17,000. Total monthly cost $141.00 versus monthly lease of close to $300 a month. If I need to spend another $5000 over the next 10 years and my car value is $0 my average monthly cost is $145 for 20 years.

I have a vehicle with one of the highest resale value. Change the value to Luxury Vehicle starting value $70,000, value after 10 years $20,000. $10,000-$20,000 maintenance, monthly cost $500-$583 over 120 month. Cost to lease $800. Saving over 120 month, $36,000 you can pay off the car and have $12,000 left over leasing.
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Old 01-19-2015, 10:35 AM
 
3,946 posts, read 4,046,039 times
Reputation: 4422
Quote:
What are you smoking? Of course it does. When you stretch a loan out, you slow down the rate at which the principal is paid down,...As a result of owing more, you are more likely to be upside down,
No it does not, because again, asset prices move independently of purchase/loan amounts. You are assuming they do, but that's an incorrect assumption. I'm not sure why you even believe they do, given recent history. The rate of decline of an asset is based on marketing, demand, and tons of other things that have nothing to do with a past purchase price.


Quote:
The point is there without having to include every last detail. This is not a straw man.
Yes it is. Actually the subtext of your point seems to be that middle class/lower middle class people are poor at managing their finances, but you just wanted to couch that in accounting terms.
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Old 01-19-2015, 11:18 AM
 
12,707 posts, read 9,981,349 times
Reputation: 9515
Quote:
Originally Posted by thelopez2 View Post
You title is deceiving since it is more about your point of building wealth than defining expense.

Maybe you should rethink your approach or give it up. They aren't thinking, talking, planning, long term wealth, they want some new wheels. If someone walks into McDonalds, they are there for a burger, not looking how if they save their $4 now, it can be $8 if they put it in the markets.
Right, and this type of short term thinking may be the very thing that keeps them from getting ahead.

Quote:
Originally Posted by thelopez2 View Post


Similarly, on these forums and elsewhere people looking at rental property view the cost of the property itself in terms of their monthly payment and then calculate a cash flow. Strictly speaking of course, this is irrational, unless liquidity is tight. This 'monthly payment mentality' is irrational, and this is easy to see if you do a simple calculation of ending wealth.

I bought a property for $200,000 and it cash flows, $800 goes to interest and $300 goes to principal, the property value goes down, from $200,000 to $100,000, my cash flow remains the same, my $300 in principal is not building equity, it is an expense regardless of the equity and long term wealth. The moneys used in the mortgage was spent to acquire the property. Liquidity should ALWAYS be consider tight.
In this case you have interest expense and depreciation of the property value. Principal payment is STILL not an expense in this case, as the amount you lose due to this property depreciation is independent of how much the balance got paid down.

Quote:
Originally Posted by thelopez2 View Post
Since you know THEIR thinking is irrational, you'd be more irrational thinking you can change the opinion of a irrational person, so stop trying, you are right, you'll be the 25% not living paycheck to paycheck. Most people on these boards aren't opened minded. They are know it alls

In any of the cases, absent liquidity problems or crunches, there is no situation in which you get a better answer treating principal payment as an expense than you do if you simply see it as it is - an internal transfer that is incidentally also required.



An expense is different than a Profit and Loss which equates to value.

It is an internal transfer if you can transfer it back, which you can't easily do. If you are obligated to pay it, then it is a monthly expense, we saw what happens with Interest Only loans, you will have to eventually pay the piper and there might be a credit crunch when you do.

If you have a $10,000 auto loan at 3% and have paid down $5,000. It'd be hard and more expensive to tap that equity, is it liquid no, can you get a title loan at over 15%, yea, I'd call this a liquidity problem. Liquidity should be consider for each asset individually. What if you don't have a job, how liquid is your "previously paid principal", it is an expense that you may not be able to get back to cover other future liabilities.
Right, if you don't have (other) liquid assets, then it's a problem. I never argued against that.

Quote:
Originally Posted by thelopez2 View Post


CNN reports 75% of Americans are living paycheck to paycheck.


Lovehound's post was targeted at me, I was really hoping he found a legal way to write off principal, but sadly no.

The principal payment is a teeth in the gear of the machine that creates profit. Take away the teeth the machine doesn't work.

I'll be the first in line when principal is not treated by underwriters as an expense, I'll gladly increase my debt load 30%
Not all principal even is treated that way by underwriters - for example, underwriters do not deny a loan based on the affordability of the balloon payment, if there is one.

The thing that underwriters care about is your chance of default, which is affected of course by whether you borrow more money to meet the obligations. in the case of a balloon it is expected that it will be refinanced. Amortized principal is treated differently because the underwriters expect this to be paid out of current cash flow rather than further borrowing, not because it is an expense while a balloon payment is not.
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Old 01-19-2015, 11:23 AM
 
12,707 posts, read 9,981,349 times
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Quote:
Originally Posted by TheOverdog View Post
No it does not, because again, asset prices move independently of purchase/loan amounts. You are assuming they do, but that's an incorrect assumption.
No, I am not. Upside down means you owe more than the asset is worth. If you paid the loan down enough, then you don't owe more than the asset is worth, despite the fact that its value has not been altered based on the balance of the loan.

Quote:
Originally Posted by TheOverdog View Post
I'm not sure why you even believe they do, given recent history. The rate of decline of an asset is based on marketing, demand, and tons of other things that have nothing to do with a past purchase price.

Yes it is. Actually the subtext of your point seems to be that middle class/lower middle class people are poor at managing their finances, but you just wanted to couch that in accounting terms.
Sort of.
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Old 01-19-2015, 11:38 AM
 
Location: Keosauqua, Iowa
9,181 posts, read 16,663,943 times
Reputation: 12331
Quote:
Originally Posted by ncole1 View Post
Right, and this type of short term thinking may be the very thing that keeps them from getting ahead.
In theory, maybe.

But in reality, I've known several people who bought homes because it made more sense to them for part of the payment to go to equity in the home, but ended up facing significant financial hardships because they underestimated the additional expenses involved in owning a home.

Conversely, I don't know anyone who continued to rent when they were in a position to buy who didn't end up doing very well for themselves by investing the money that would have gone toward repair and maintenance if they had owned.
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Old 01-19-2015, 11:42 AM
 
12,707 posts, read 9,981,349 times
Reputation: 9515
Quote:
Originally Posted by duster1979 View Post
In theory, maybe.

But in reality, I've known several people who bought homes because it made more sense to them for part of the payment to go to equity in the home, but ended up facing significant financial hardships because they underestimated the additional expenses involved in owning a home.

Conversely, I don't know anyone who continued to rent when they were in a position to buy who didn't end up doing very well for themselves by investing the money that would have gone toward repair and maintenance if they had owned.
Hey now, I never said anyone should buy a home they can't afford, now did I?
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Old 01-20-2015, 03:24 PM
 
1,784 posts, read 2,993,195 times
Reputation: 1270
Quote:
Originally Posted by Modification Specialist View Post
Above good illustration of paying extra towards principle!!!

Another example is paying extra towards principle on a mortgage.
  • Starting out term 30 years
  • One extra (13th) payment a year knocks (reduces) 7 years off term
  • The best is taken one payment dividing by 12, adding that 1/12th in with normal monthly payment.
  • The borrower gets reports as being more responsible to the Credit Bureaus and is rewarded with a high credit score
OK I know I'm showing up late, and haven't read the rest of the thread, so apologies if redundant [edit... yes it seems redundant but oh well, this guy constantly shows up and does this and then disappears].... BUT:

geez man, how many times have I called you out on this?

Stop listing those bullet points w/o a disclaimer or interest rate specification. Your "reduces 7 years off term" pitch is only true at interest rates of 8%. (!) At rates of 4% (cough, cough, where we have been for quite awhile now), it only reduces the term by 4 years.


Now 4 years is still good, but I have a problem with claims of almost double the actual benefit (in this current environment).
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