Money Reasons

Smart Reasons to Save, Use and Invest Money

Archive for the ‘Mortgages’ category

Choosing Your Fixed Mortgage, 15 vs 30 Year

September 13th, 2011

Eleven years ago, before my son was born, my wife and I were shopping for a house.

The common advice of the day was to buy a house that you could barely afford, because you would get increasing pay raises every year that would make the house payment cheaper as time folds.

Another piece of advice was to not make extra payments on your house, but instead invest that money in the stock market. While I don’t entirely disagree with that advice, I have to say the stock market route didn’t pan out for most of us!

Even though I respected the friends giving the advice above, I ignored both of these paths because they weren’t the best paths for me.

Since I hate debt, I couldn’t justifying buying a house that would cost me more than three times my salary. Once I had the mortgage, I tried to pay it off as quickly as possible, using self-defined milestones that would make paying back debt if not an enjoyable experience, at least a bearable experience.

Why 30 Year Instead of 15 Year Mortgage

Now since I already stated that I’m not a fan of debt, you would think that I purchased a 15 year mortgage, but I didn’t. At the time the interest rates were high enough that I had to go with a 30 year mortgage because of the smaller monthly payment. Another factor in the equation is that my wife planned on being a SAHM someday. Since we knew that my wife’s salary wouldn’t be coming in as an income stream, we needed to get the most house for my salary without creating a hardship for us financially. Unfortunately, at that time, that meant getting a 30 year mortgage.

So I took out a 30 year mortgage, how did I pay my house off in 10 years?

Well, for the first year, while my wife was still working, we doubled down our payments on the monthly payment, putting the entire extra payment towards principal. The after that I continued to put and extra 50% towards the payment until it was paid off. During a period when finances temporarily got difficult, I only put $100 dollars extra towards the principal. Later, I made up the extra payments by using the money back from our taxes. But having such flexibility might not have been the case if we had the larger 15 year mortgage monthly payment.

About six years into paying off the mortgage, I was able to refinance (for free through Well Fargo) and at that time I was able to choose a 15 year mortgage since both the interest rate were down and my payment would have been $200 less than the current payment at the time.

So in conclusion, you have to decide what works best for you and make sure you have some wiggle room. Life and job employment are linear, and having a bit of an extra cushion can really come in handy during crunch periods.

Bests,

MR

30 comments »

Posted in Mortgages

Tags: 15 vs 30 year mortgage my mortgage experience refinancing to a 15 year mortgage why a 30 year mortgage

Mortgage Free versus Paying For 30 Years

May 3rd, 2011

Today I’m going to talk about why I believe paying off your home mortgage early makes more sense for us middle folks (and probably the upper folks too) instead of investing all of your extra money into the stock market.

From some financial advisors, we hear advise such as paying off your mortgage is a bad financial decision if not down right stupid.

But unless you are a robot, I don’t believe this is true!

Let’s looks at the argument for not paying off your house early. The typical argument goes that if you take the extra amount that you would pay on your house and invest it, you’ll end up rich some day!

The problem with that argument for the majority of us is twofold:

That extra money that you were (in theory) to invest somehow gets spent in a moment of weakness or financial strain during your life.
The standard deduction is so high that sooner rather than later the itemized deduction for a mortgage is not worth it after 5 or so years (Unless you have a $300,000+ house)

Another problem is what if the market tanks like it did in 2008? Investment returns aren’t guaranteed, but the lack of a house payment is forever (at least until you upgrade to a larger house…)!

Financial strain happens, and that is why it’s wise to have an emergency fund during this process. While I didn’t have a dedicated emergency fund per se, I had money in diversified portfolio (including fixed income) that I could hit if such a need came to surface.

Since I am mortgage free, and no longer have a mortgage, saving is much easier for me now (after a period of adjustment).

-MR

8 comments »

Posted in Mortgages

Tags: 30 years vs mortgage free debt free mortgage free why pay a mortgage off early why pay off your house early

Paying Off Your Mortgage is Like Working at a Second Job

March 2nd, 2011

House Working Part-Time?

Paying off your mortgage is like working at a second job!

By paying off my mortgage early, I get to keep an additional $15,000 a year!

Let’s say that you decide that your first job wasn’t enough money, or that you want to dig yourself out of debt. If you were to get a part time job working 20 hours a week at a wage rate of $14.42 all year round, using straight simple math, that would be the pay rate that it would equal to have $15,000.

But that’s not entirely true, actually you would have to work 20 hour at a pay rate of $18.03 (assuming your in the 25% marginal tax rate). The reasons for the higher pay rate is that the money that you would pay your mortgage with would be after tax money. Even that number is low since I didn’t take out FICA, insurance, state tax, etc!

This year, I’ve really noticed that my checking account balance is growing quickly! I’ve transferred money from my checking account into my online brokerage account every so many months. It’s been great!

Some may say “but what about the itemized mortgage interest deduction and the fact that you cannot deduct the interest on mortgages” . Well, I’m going to tell you a secret… after you get your mortgage payments low enough after a few years, the standard deduction is so high that those itemized deductions really don’t matter! For my family, it didn’t take long to hit the break even point between the standard deduction and itemizing things. Since we were prepaying, we met this crossover threshold after about 5 years.

The extra money has come in handy for us, making it easier to afford sports and other activities for our kids. We are also planning larger vacation, perhaps even overseas soon.

The beauty of that extra $1,250 each month is that I can invest most of that money so that it even grow more quickly!

Do you share my viewpoint that not paying $1,250 extra a month would be equivalent of getting a part-time job working 20 hours a week? Of course, if for some reasons my primary job was lost, so would my pseudo part-time job too.

-MR

Did you like this Article? Then please subscribe to my RSS feed so you can check out new articles when they become available. You will help this blog grow by doing so. Thanks!

42 comments »

Posted in Mortgages

Tags: debt free morgage free No mortgage is like a parttime job

By Percentage, The Rich Are Now The Number 1 Mortgage Defaulters

July 13th, 2010

According to this New York Times article: (Click here to read), the following is taking place:

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

The article goes on to say that only 1 in 12 below the million dollar mark is deliquent!

Okay, so perhaps the rich aren’t out on the streets… In fact, usually it’s a 2nd home or a rental property that they are delinquent with the payment…

The article states that the Rich are more ruthless. Actually first, I’m sure if “us, less than rich folks” had a 2nd house or rental property, we would consider unloading it too, especially if we were losing money on it.

Second, I think since the government is attacking this social class, they no longer feel obligated to do what is best for the economy or government. After all, they are being secretly or blatantly (depending on your viewpoint), attacked from the government. So why care, since they are being view as the bad guys anyway.

Mostly, I think they see it as a bad investment that no longer makes sense though.

I initially was going to write this post around the fact that strategic defaulters are bad, and I would take the high road and stick it out. But, since the 2nd home or rental property is really an investment… Now, I’m not so sure! I would like to think I’d do the right thing, but they are losing money on these investment, and the government is kicking them while they are losing that money…

Readers, what would you do if you have a 2nd home or rental property in a place like Las Vegas (where the value of homes have practically halved)?

-MR

10 comments »

Posted in Mortgages

Tags: rich defaulters strategic defaulters

Warren Buffett Was A Renter

June 19th, 2010

I’ve started to read “The Snowball“, which is a biography of Warren Buffett. So far, it’s a facinating book, that has changed my perspective on my “Financial Hero #2 Warren Buffett” post.

Although I’m only 1/4 of the way through the book, I wanted to mention something that I wouldn’t have guess about Warren Buffett. He was a Renter!

There was a time when Mr. Buffett was just a little rich (my my standards) and so he was a renter. When he was 26 year old (and rich by most of our standards), he said that he was retired (but really this was just the beginning). He had gathered enough money by that age that he would live off of the money he had at the time. He believed that he could live off of that money through his stock market skills (and he was right). But he didn’t stop there, no sir! He started managing trusts for people. They would invest and he would manage their money into investments.

Warren rented because he didn’t want to tie up his money in a house at that time, after all, he needed to live off of the interest on the stocks he owned. This was highly unusual at the time, especially considering that even at 26, he would have be considered rich by most standards.

So all of you Renters out there that claim your way is the best… you might be right, especially if you have investing skills like Warren did.

The catch is he didn’t rent for very long after he was 26… Eventually he bought a house (I think the one he lives in today).

So you crafty renters out there that might be investing tons of money! Hats off to you all!