Another week, another TVM scenario for you!  You can use any financial calculator to do these, but if you want the BEST, you can get our 10bii Financial Calculator for iPhone/iPad, Android, or Mac!

This week we’re going to sell our rental house to pay off our personal residence!


THE SCENARIO:

Building off the last couple of articles, we’re going to stick with my mortgage.  To recap, here are the pertinent details:

I put $100,000 down and borrowed $350,000 to buy a house 34 months ago.  The mortgage amortizes fully over 30 years, has monthly payments of $2,241.09,and the rate is 6.625%.  I still owe $338,465.83, and thanks to a generous inheritance from my late Aunt Matilda, I bought a rental house, which is putting money in my pocket each month.

The terms of the rental house mortgage: 30-year amortizing loan at 3.375% interest, $150,000 originally owed (the house is worth $250,000, but I made a $100,000 down payment).  The payment on the mortgage is $663.14 per month, and my rent after expenses is $1,094.50.

a) After 10 years has passed, how much do I owe on my home’s mortgage, assuming I make only the required payment each month?

b) After 10 years has passed, how much do I owe on my rental house’s mortgage?

c) If my rental house appreciates in value at 6% per year for those 10 years, how much is it worth at the end?

d) If it costs 10% in commissions and fees to sell a house, how much money could I get out of selling my rental house after 10 years?   

e) How much of that money would be left over after I repaid the remaining mortgage on the property?

f) If I used the proceeds to pay down my home mortgage, how much would I still owe, or how much would be left over?


THE SOLUTION:

a) N is 120 (10 years is 120 months), I/YR is 6.625, PV is $338,465.83, PMT is -$2,241.09.  I solve for FV and determine that after 10 years, I’ll owe $275,309.25.

b) N is 120, I/YR is 3.375, PV is $150,000, PMT is -$663.41.  I solve or FV and determine that after 10 years, I’ll owe $115,619.58.

c) Since we’re talking about annual compounding, I set P/YR to 1.  Then N is 10 (10 years), I/YR is 6 (6% annual appreciation), PV is $250,000 (the current value of the house), PMT is 0 (the house’s appreciation doesn’t have an annual payment or income related to it).  Solving for FV, I find that after 10 years, my rental house will be worth $447,711.92.

d) Paying 10% in commissions means that I receive 90% of my house’s value.  90% x $447,711.92 is $402,940.73.  

e) I still owe $115,619.58.  After I pay off that loan, I get to keep $402,940.73 – $115,619.58 = $287,321.15.

f) If I took that $287,321.15 and paid down my $275,309.25 remaining balance, I’d have that mortgage completely paid off and have $287,321.15 – $275,309.25 = $12,011.90 left over.  

If you recall from last week, you’ll realize that during that 10 years, I was also receiving $431.36 per month in rental income.  If I’d stuck that money under my mattress (i.e. did nothing with it other than accumulate it), I’d have a stash of $431.36 x 120 = $51,763.20.  And that’s on top of having my home paid off with 12 grand to spare.  Not bad!


That’s it for this week, I hope you enjoyed it!  I’m not sure what we’ll discuss next week, but at this point I’m thinking… notes?  Probably.  Notes can be pretty awesome.

See you next time!

Money Blog – Turning two mortgages into one free-and-clear house
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