Model Home Loan / Compare PayOff With Not

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Joined: Thu May 28, 2020 6:21 pm

Model Home Loan / Compare PayOff With Not

Post by pkellner »

Here is my real world case:

The bank and I own my house that is worth $600,000 in total
The Bank owns $200,000, I own $400,000 of it
I have 15 years left and my payment is $1100 per month
I have savings of $500,000 total.

I want to run a monte carlo and compare my chances of what happens if I pay off my loan completely or pay it off as I'm doing now.
What are my chances if I put the money in the stock market? What if I put it in bonds, savings account?

I can find no option that remotely gives me a way to model this with FRP that takes into consideration huge important factors like:
The interest I pay is deductible from my income
The mount of the principle/interest changes as the loan balance goes to zero

Am I missing something obvious? it seems like extra inputs are just a simple linear drop down with a start and end date.

Posts: 596
Joined: Thu Feb 28, 2008 6:48 pm

Re: Model Home Loan / Compare PayOff With Not

Post by jimr »

You're right that the cash flows in additional inputs are just linear so it'd be tough to perfectly track the "interest only" part of the cash flow to adjust it to account for the deduction.

OTOH, the problem may be even more complicated because as the interest is reduced, it's possible that the deduction may suddenly become worthless because taking the standard deduction produces a better result.

In these situations, it's often best to break the problem down into multi-year periods (say 3 years or 5 years) and specify the relevant cash flows over these sub-periods. The trick here is to figure out how many sub periods to break things down into. 5 year periods provides a more course result but is less work, while using 3 year periods would give better resolution, but require 5 entries to cover the 15 years.

When you do this, just make sure the perod start and end dates don't overlap and check out the detailed view tab to be sure the planner interpreted the cash flows you entered the way you expect.

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