Help me justify the financing

[Disneymooners93]

I am not asking if DVC is good for me. I am sure it is – WDW trip every year or two, 3 small kids wanting at least a 1BR as we grow, “owning” a piece of Disney, etc. Long haul it will be to our advantage. Pretty much settled on SSR too. However, I added the numbers up for financing 150 points, $14,250 ($95/point) and got a little “sticker shock”.

$14,250 - $1425 (10% DP) - $1500 ($10 off/point incentive) = $11,325 financed

$11,325 financed 10 yrs @ 9.75% = $17,772 in monthly payments for 10 yrs.
$6447 in interest or 1/3 the total cost!!

$17,772 + $1425 (down payment) = $19,197 total invested, $128/point!! That's not including the $10/point incentive. Without the incentive it’s $138/point and double need for the down payment.

Yes, a resale would be cheaper, but I need to finance if I buy into DVC. No, I don’t have a home equity or other loan to add on to. Right now, it’s either this or 401K…

Granted a bigger down payment and/or paying off before 10 years will greatly reduce the total invested, neither of which is much of an option for me at the moment. DW may be restarting her career soon in which case we will be able to pay off quicker. If we don't buy now and she does go back to work, we would be able to save more up front. Maybe even look into a couple small resales over time or finance with Disney more in our favor. But that will be further down the road. Meanwhile prices will keep going to go up, can't count on incentives, resale on SSR will go up, time on the contract shrinking, etc.

Am I overly scared of this interest amount? Is this still a better deal if I act now than what I will have if I wait? What have other people thought about financing – anyone finance the full amount too?

 

[tjkraz]

Well, there's a few different ways to look at it. Many people will tell you that if you financially NEED to finance a timeshare over 10 years, you probably shouldn't be buying a timeshare.

By and large I agree with that philosophy. But Disney is a little bit different. Many families find a way to budget $2000+ for annual cash trips to WDW. Even with the additional interest you'll pay, you will still break-even on DVC in about 10-11 years. So, by the time you get around year 12, you're starting to get some return on your investment.

If you know, beyond a shadow of a doubt, that your family WILL find a way to vacation at WDW annually into the forseeable future, I think it's better to put your money into DVC rather than to throw it away on cash rooms over that same time period.

And yes, I think you're better off doing it now rather than waiting. Prices will only continue to climb, while the contracts get shorter.

Make every attempt to pay off the note early. And do remember that the interest is tax-deductible if you itemize.

 

[Y-ASK]

Well there a few financelly minded folks here who will tell you that borrowing money for a timeshare from your 401K might not be the best idea. Now everyone's situation is different but consider this; if you borrow from your 401K you are paying yourself back over the next ten years (if you can get a loan for that long). All the interest goes into your 401K account, not some other bank's pockets. Now I just looked at my 401K and I looked at just about all the funds available to me. While last year may have been a good year in the market, I actually am sitting on a -5% loss over the last five years which includes the postive year last year. Now if I had taken half that money and gave myself a loan I would have been collecting 7.5% which would have significantly off set the loss. No one knows what the future is going to hold but if I knew that I had a secure job and that I could guarentee a 7.5% return on investing in myself, that to me would be a good deal. I'm not an expert on the subject but I personally would consider myself a good investment because I know I will be able to pay the money back. Can you say that about world events that can easily cause the market to drop sharply again? And even if you play it safe in the market, I doubt you will get a 7.5% (what I 401K loan rate is at this moment) return on your investment. The potential is there to possible make more by leaving your 401K as it is but then again the potential is there to lose as well.

Y-ASK

 

[quentina]

Well, we financed for 8 years. We are half-way to our payofff. Yes, we needed to finance. No I do not pay any more on my loan. Too be honest, the money is a direct debit and I never even think of it one way or another. It is taken out of savings and I do not miss it.

Now I will say.....If it cost me thousands in interest, it was still worth it. For the past 4 years, I have spent every year at WDW and also HH for 6 nights in the summer. I do this with 200 HH points....Now, I am forever in the borrowed stage!! I am sure if I worked these figures off of rack rates, I am very close to breaking even on this. When we go to HH in July, our 2 bedroom is listed for over $400.00 per night. We would never be able to stay in these type of resorts without our DVC.

Also, we tend to bring my parents along. Because we are covering the lodging, they pick up the food bill. I think of it as a free vacation until my hubby reminds me that we do pay for it.

Honestly, I do not miss the $210.00 per month. I would recomend DVC to anyone who was willing to listen!

I hope you make the right decision

Kim

 

[Disneymooners93]

Well, there's a few different ways to look at it. Many people will tell you that if you financially NEED to finance a timeshare over 10 years, you probably shouldn't be buying a timeshare.

By and large I agree with that philosophy. But Disney is a little bit different.

That's what I think as well, which is why I posed the question. Our financial situation is good enough to enjoy Disney although its a little harder since we've moved away from Disneyland. But if DW gets back into her career then we'll be very well off given our means making all this mute. Our ONLY extravegance is Disney, other than the house we might buy if she goes back to work.

How about I look at it this way. We almost purchased DVC at the end of 2001 when BWV was selling and VWL was just about sold out. I looked at the interest payments from the same negative perspective. I believe points were $67 then, after $10 off for turning in first year points. Financing a full 10 years would have made those points $97.50 after interest, just about the going rate now, only three+ years later. Obviously, better than what I am looking at today. Finance wizards am I looking at that correctly?

My reference to borrowing from 401K was more a joke related to a previous thread. I'm not going to touch that. I'll need it when I'm taking my last trip to SSR when I'm 85.

 

[ColoradoBelle1]

Hi Y-Ask ,
I'm with you insofar as borrowing from my own retirement and thus paying interest to MYSELF as opposed to paying interest to a bank! It makes escellent financial sense and I'm not sure why some people are dead set against it...but they might not realize that their 401K is making less than a 9.75% return. Your example of rates of return the last five years were on the mark. The comment that we never know what will happen market wise is also true!!!! Back in l999, I decided to leave the college money that I had put into mutual funds growing for d's college because it had earned 28%. I paid out of our income instead. HAHAHAHAHH...the market crash of 2000 certainly laid foul to my well intentioned plans!

What Y-Ask is saying is IF you have a 401k and are eligible to borrow that money from it...you end up increasing your retirement benefits by 9.75 per cent a year paid to yourself...how great is that? Why make the bank or Disney finance rich when you can make yourself richer?

Perhaps, tho, you don't have a 401k and it isn't an option...so then you have to justify the additional expense. This may be an unpopular answer BUT...
rather than pay that kind of interest, I would consider three alternatives:
ONE: when you go to DIsney rent a timeshare just offsite, like at Westgate (beautiful villas but so many of them that timehare owners rent them for less than the maintenance costs...you can often rent for a week, even thro Westgate itself for @$350 a week for a 2 bedroom villa). TWO: if/when your wife goes back to work, start a slush fund of 'money to buy our DVC' and when it gets to that $14,000 mark...go for it! THREE: if you HAVE to stay onsite when you vaca at Disney (and some of us just have to..Im one!) then look for rental deals on points that are distressed and under $10.00 a point and try to stay during value times in the smallest unit you can....if you are a fam of 4 you can stay in an OKW studio for 8 points or 80 a night. If you are paying more for your points including financing than you can rent points for...then it doesn't quite make sense to me, but then I am very conservative about borrowing money. (raised by depression era parents and learned that lesson in full! I get nervous when people take on too much debt, and I get nervous paying any kind of interest that isn't tax deductible (so anything other than equity loans.) I DO have a 3.25%car loan, but that is cause I knew I could invest that money and get a higher rate of return.
For me, I just made an offer on DVC, but I figured that I could actually earn an 8% rate of return on the money invested IF I HAD TO...so that effective yield would justify the investment.

Bottom line: we all can easily justify doing something we really really want to do. But if you are a family man and don't yet have equity in your home to borrow on (and at least get the tax deduction on interest), then maybe you might postpone this purchase for a few years til you get that second income cushion. Whatever you decide: good luck to you!!!!
Colorado Belle

 

[Happy Birthday Cat]

You're only looking at one side to the equation IMHO (or at least glossed over the other side). Would you go to WDW anyway, whether you own DVC or not? If not, then you are looking at it correctly. If you you go anyways, then think about that cost too and getting nothing in return for it.

Before I discovered DVC, on our last "pre DVC" trip, we spent over $7,000.00 for two connecting rooms at the POLY for my family of 6. If I had put that and the many other trips that I had taken toward the purchase of DVC, I could own a lot more points today than I do. We still take an occasional non-DVC trip but the amount of money we are saving as a result of not following our old WDW resort habits, is amazing, interst and all.

Other savings: Big discount on AP's. If you own AP's you can get the DDE card and save 20% on all meals. All of that matters in the long run.

HBC

 

[Y-ASK]

Hi ColoradoBelle1,

Yeah I read through that thread too and thought about it for awhile. Borrowing from you 401K is not for everyone, but it's also not this tragic tale that people want to make it out to be. Show me where I can make over 7.5% on my money in the stock market guarenteed and I'll change my tune. It's all risk unless you put it into government funds and then it's probably less than a 3% return. The key to my thinking is that I have really good job, I'm not going to lose it any time soon, and I trust myself to pay the money back. Heck it comes right out of my paycheck and I never see it except on my statements. So don't be so quick to pay someone else $6447.00 in interest payments when that money can be realized in your own 401K. Just my opinon...

Y-ASK

 

[Laurajean1014]

We analyzed it all different ways.

We purchased 230 points in '95 for a 10 year loan with 20% down. We mortgaged through DVC and use it as a tax deduction, as well as, some of the condo dues. Where else will Uncle Sam give you a tax break on your vacation?

We have 7 add-ons all purchased through DVC and do not regret any of the 31 trips we've taken since '95.

Go for the 10 year loan. If you DW goes back to work, than you can pay it off sooner. When DH or I get a little extra $$$, I payoff the smallest amount owed and I feel great knowing that I'm that much closer to the end date.

Our last payment is 12/15/05! Yes, that is right, this year. It will go by fast for you too!

Go for it.

 

[bongo59]

financing is always the second best choice............and i would never ever borrow anything form a 401K.........it is not good financial sense.............i would suggest you save your money first then buy............WDW is not going anywhere and will still be waiting for you when your ready

 

[Shamus]

$11,325 financed 10 yrs @ 9.75% = $17,772 in monthly payments for 10 yrs. $6447 in interest or 1/3 the total cost!!

I remeber being happy when we were able to secure our First Home loan for under 10%. LOL Of course that was 15 years ago, but if we held it to its 30 year maturity a $200,000 loan would have had total payments over $600,000 and cost us over $400,000 in interest.

As others have said you need to look at it as a yearly expense, then ask yourself if you would have still spent that amount (or something close to it) on your vacation lodging for that period. If the answer is NO then DVC is most likely not the best move for you right now.


Shamus

 

[MikeyNS]

Don't ever look to see how much you actually are paying for a mortage on your house then.. it'll make you want to rent.

I chose to get a secured line of credit from my bank.. much cheaper interest rate up here in Canada, plus I can pay it off at my leisure. I think it'll take me 5 years or so, but for the savings I got from renting a 2BR @ SSR in October (~$5,000CDN for the week) and a studio at the BWV a few weeks ago (~$2,000CDN) it's been an absolute fantastic vacation investment.. plus I have 48-49 years to go to enjoy it!

 

[Y-ASK]

and i would never ever borrow anything form a 401K.........it is not good financial sense.............

Would you please support this opinion with some sound factual information as to why it does not make good financial sense? Show me some realistic numbers that support what you saying using recent (last 5-10 years) data. Here's my data over the last five years using a very basic example:

Let say I have $1000.00 in my 401K five years ago and my plan allows me to borrow 50% so I take out a loan of $500.00 for the full length term of five years paid monthly. So the five years is up and the loan is paid off let's see how much I've made:

$500.00 Loan Paid Back
$101.20 Interest Paid into account (20% or 4% a year)*

$601.20 Total

Now lets look at what happened to that other $500.00 I left in my 401K. I put that money in Growth not Aggressive. Basically over the last five years I am still not yet back to even money. I've lost 5% of my investment so that means the $500.00 left in is now only $475.00. Loss of $25.00 or 5%. So now after the loan was paid off I would have the following:

$601.20 Loan and Interest
$475.00 Money left in 401K

$1,076.20 Total

So let's see what would have happened if I left all $1,000.00 in my 401K. I would again see a 5% lost which would result in a $50.00 reduction to my initial amount. So I would end with:

$950.00 Total

So instead of a $50.00 loss I actually have a $76.20 gain if I had taken that loan out 5 years ago.

* Keep in mind that while you are paying off the loan the money is being re-invested so if you are seeing a strong year your payments will still make a positive difference to the overall success of your 401K so don't let that 4% a year over five years fool you. You're still seeing positive gain if your 401K is doing well. If your 401K is not doing well then that is just that much more investment that will be on the negative side of your overall interest.

Borrowing from you 401K is not for everyone but I have yet to see, with real numbers, where it's really a bad thing to do. If you ask me it's similar to the same blanket statements that people like to throw out that you should buy a home so that you can get a tax break as the main reason for home ownership. So let's see I want to pay the bank $10,000 a year of money that I will never see again so that I can get back $2,000.00 from Uncle Sam. How about I pay Uncle Sam that $2,000.00 and you let me keep the $10,000.00 .

Y-ASK

 

[Y-ASK]

My reference to borrowing from 401K was more a joke related to a previous thread. I'm not going to touch that. I'll need it when I'm taking my last trip to SSR when I'm 85.

And one last point: What makes you think that money is going any where other than back into your 401K? You're not withdrawing that money and then never going to see it again. You need to look at that transaction like the money is still there, you just invested it in another direction. There's nothing wrong with borrowing from your 401K since you were going to take that loan out any way because you can afford the payments and you don't want to wait another five years to save up.

Y-ASK

 

[gjw007]

Borrowing from you 401K is not for everyone but I have yet to see, with real numbers, where it's really a bad thing to do.
Y-ASK

May I ask why you use a negative return in your analysis for the 401K. It is true that there are times when the market declines but over a length of time, it will grow somewhere around 8%. My real question is if you espect to loss money by putting it into a 401K plan, why put money in there to begin with? You put money in there because you expect it to grow, not decline. If you use an expected negative return on your 401K plan, taking a loan like you suggest will always result in the loan giving you a better return.

As an analysis practice, I do think it is a good idea to run the numbers through various scenarios, including where there is a decline like your example shows. But you also need to compare where it would grow. If I were expecting to have a negative growth in my 401K plan, what you propose would not be a bad idea because you are maximizing the return. If on the other hand, the market takes off, you have ensured yourself of a nice little return in exchange for missing the larger gain.

I have done what you suggesed in 1999, taking out a loan against my 401K plan. If I waited another 9 months, I could have taken out the same amount of money but haved used fewer shares in may account to do so. If I had waited a little over a year from the time that I did take it out, I would have used a lot more shares on the dot-com failures began to affect the marketplace. In the end, because the market went south, my decision to take out the loan was good only because the market tanked but if the market had continued to grow, I would have had less money in my 401K.

Sometimes it is necessary to borrow money from your 401K plan. Purchasing a house is a good exam. But purchasing a timeshare from it is not a good idea. I strongly recommend against doing so.

 

[TheBeast]

I think you need to compare the cost of DVC (with interest) against what it would vacation rooms would cost without DVC. Forget that part of the equation is interest, it's not really relevent.

IMHO, it seems a stretch to be borrowing for 10 yrs for a time share, but then again, before last year I never thought I'd buy one at all! Now I'm very glad we did.

As for 401K, it's worth reading through the other thread. I'm in the camp that it's not such a bad thing to do, but there are lot's of pros and cons.

Best of luck in your decision...

 

[Disneymooners93]

I was asking about financing and referenced another thread on a whim which went kind of like this one is going. Sorry. I have never been in debt more than a simple car loan and this 9.75% seemed large. I wanted to get other peoples perspective about taking that on for DVC ownership. Thanks for all your responses.

I am not a finance person so I am not interested in playing around with my retirement and guessing if it will be a good year or bad. One third of my retirement is directly tied to my 401K (with another third to Social Security, yikes). As it is my 401K accounts have an annual return average of 12% over the last 10 years (that's including the 3 years of big losses). Can I do better overall with a 401K loan - perhaps.

 

[tonyhoop]

Do you pay property tax when you are a member of DVC?

 

[DisneyWorld Delight]

Finacing DVC seems crazy. I would LOVE to own DVC and am ready to buy as soon as I have the cash. I know everyone says the reason to purchase DVC is for "future vacations." But I belive we all realize DVC is more of a financial investment than anything; as WDW resort prices will go up over time. That being the case, you are throwing money away by financing. At least if you are spending higher prices on resorts, you are actually physically there. You can't swim in SAB with your receipt for 10% interest.

 

[tjkraz]

Do you pay property tax when you are a member of DVC?

Yes. It's included in the annual dues, and is normally the only part of the dues that is tax-deductible. But it's not a very large figure. It varies by resort, but is on the order of $.60-.80 per point. Someone with 150 points may have $100 to deduct in a year.