This week we're going to buy another house to try and pay off our first house faster!
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 have $100,000 to use to help me with my mortgage.
Instead of paying down my mortgage, however, I'm going to use the inheritance to get another mortgage, this time on a rental house. It may be strange to try to retire my debt by taking on more debt, but let's see if I can make this work.
I'm going to buy a $250,000 house, and put $100,000 down.
a) What's the PV (present value, or initial amount owed) of my loan?
b) If I get a 30-year amortizing mortgage at 3.375%, what's my payment?
c) If I can get $1,990 in rent from the property each month, and expenses run me 45% of that, what's my net rent?
d) How much does owning the house cost me or earn me, on average, each month?
e) My home's mortgage payment is $2,241.09. How much do I pay out each month if I take both my home's mortgage and this rental house's net rent and mortgage into account?
THE SOLUTION:
a) The house costs $250,000 and I borrow all but $100,00 of that. Therefore, my PV is $150,000.
b) N is 360, I/YR is 3.375, PV is $150,000, and FV is 0. Solving for PMT, I find that my monthly payment is $663.14 per month.
c) 45% of $1,990 is $895.50.$1,990 - $895.50 is $1,094.50. That's my net monthly income from my new rental house.
d) It earns me $1,094.50, and my mortgage payment is $663.14. So after my mortgage payment, I get to keep $431.36 per month.
e) My home mortgage costs me $2,241.09, and this rental house earns me $431.36. So, combined, I pay out $2,241.09 - $431.36 per month. Doing the arithmetic, my monthly total payment is $1,809.73.
This is the setup; next week, we'll cover how selling the house after some time has passed can help me pay off my own mortgage.
I hope you enjoyed this week's article! See you next time!
