How to calculate whether it's better to pay my education loan, or my home investment loan?
I have an education loan @ 11.5 % for 1,000,000. I can pay it in 3 years.
I am planning to make an investment by buying a home @ 10.5% for 2,200,000. Term = 20 yrs.
I am thinking if I sell the house after 3 years, I may get 2,500,000 (estimate).
Now I can save 600,000 per year for repaying the loans. I could pay my education loan within 2 years completely, or pay partially the education loan and partially the investment loan.
I am not sure how to calculate if I will make profit or loss by doing the investment. Can some one guide me on how to do the calculations?
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You can use this formula:-
www.financeformulas.net/Loan_Payment_Formula.html
pmt = r*pv/(1 - (1 + r)^-n)
where
pmt = periodic payment
pv = present (initial) value of loan
r = rate of interest (as a decimal)
n = number of periods
So for the education loan,
pv = 1,000,000
r = 0.115
n = 3
annual payment = pmt = r*pv/(1 - (1 + r)^-n) = 412,776.36
And for a mortgage on the house,
pv = 2,200,000
r = 0.105
n = 20
annual payment = pmt = r*pv/(1 - (1 + r)^-n) = 267,285.18
At the end of each year for the first three years you would be repaying
412,776.36 + 267,285.18 = 680,061.54
This exceeds the 600,000 you can save, so the house investment is not feasible.
Selling the house after three years might have yielded 300,000 but the mortgage would have cost 267,285.18 each year, so it would not have been a good investment anyway.
It doesn't need any calculation. You would need to save and pay off the education loan first. You can do this in approximately 2 years. The profit in selling the house would be 300,000 and is too low – that will not even cover the various fees you would incur while selling.
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