Easy Trick to Shortening Your Mortgage by Years (I do it!)

I love this topic because it feels so good to get this big of a bang for your buck.  Did you know that if you have a 30 year mortgage, the total amount you pay can be more than double the amount of your original mortgage because you’re paying over such a long period of time?  For the record, I’m a fan of the 30 year fixed mortgage. I’m a bigger fan of a 15 year fixed mortgage, but you’re safe as long as your interest rate is fixed and 30 years or less.

Let’s look at some key factors in a sample mortgage (my favorite mortgage calculator):    

Mortgage Amount $100,000
Mortgage Duration 30 years
Monthly Payment $536
Interest Rate 5%
Total Interest Paid $93,255
Total Amount Paid (Principal & Interest over 30 yrs.) $193,255
Total Payoff Time 30 years

You can see you’re paying almost double  the amount of the loan ($193,255 compared to the original loan amount of $100,000) over the 30 year duration.  Ouch!! What happens if you pay one extra payment per year, say at annual bonus time? Use my favorite ‘extra payments’ calculator to calculate your personal situation.

Let’s work the same sample paying ONE extra payment per year:

Mortgage Amount $100,000
Mortgage Duration 30 years
Monthly Payment $536
Extra Payment Made Once/Year Over Life of Mortgage $536
Interest Rate 5%
Total Interest Paid $74,584
Total Amount Paid (Principal & Interest over 30 yrs.) $174,584
Total Payoff Time 25 years 
Amount Saved $18,671
Time Saved 5 years

You can see in this example, the person's total amount paid is far less: $174,584 compared to $193,255 (from the example above).  The person saves $18,671 and most importantly, she saves 5 years of payments.

Having your mortgage paid down earlier is a huge benefit especially if you've got kids in college at the time you stop having to pay mortgage payments or at retirement.  Think how much more comfortable your life would be without having to write that check each month. It can change your whole financial picture.

If you get a tax refund, annual bonus, or save a little each month, you can probably muster one extra payment to save yourself years of mortgage payments and thousands of dollars (potentially hundreds of thousands). Just sayin’…

 

5 Things You Should NOT Do with Your Credit Card (including one I’ve done in the past)

1. Don’t make your credit card company “twitchy” –  Consistency is the name of the game. Don’t make any sudden moves like charging a new car to get the miles or suddenly opening a bunch of new credit lines (car, consumer, and mortgage). Your credit card company periodically runs your credit rating. It can be yearly, more frequently or never. It’s random. Stay consistent with your spending, amounts and types of credit you have. Credit card companies can limit or cancel your card if they perceive increased risk even if you pay the full balance off the next month.

2. Don’t worry about your rate changing on existing debt -  As a result of the Credit CARD legislation that passed in 2009, credit card companies cannot raise your rate on existing debt except under three circumstances: 1) a promotional rate expires; 2) you are more than 60 days late with a payment (missed 2 payments) or if you have a variable rate credit card and the index it’s tied to has changed. Remember, it can be raised at any time with 45 days notice on your future balances for ANY reason or no reason at all.

3. Don’t pay down big chunks suddenly – Credit card companies sometimes practice a strategy called “chasing the balance” where they decrease your credit limit (the total amount you can charge on that card) after you pay down a big chunk of it. They are worried about “increased risk to ability to pay.” Say you have $5000 credit card balance that you've had for months, and you get your bonus. You pay off $4000. Your credit limit was originally $7500 and after you paid most of it off, your credit card company cut your limit to $1000 (which happens to be your balance).

What you should do is take the $4000 and put it in a separate account. Every two weeks, send a check to the credit card company of $500 or $1000 until you have paid the whole $4000 down. They don’t get nervous about that. I know, you are paying interest for the few months it takes you to pay it down, but that’s the price you pay to keep your credit limit at $7500. Unfortunately, chasing the balance is legal.

4. Don’t carry a balance because you think it helps your credit score – the best thing for your credit score is to charge items, preferably about the same amount each month and pay it off every month. Charging and paying helps your score, not having revolving debt - no matter how low the amount is.

5. Don’t cancel credit cards even after they’re paid off (this is the one I’ve done) –You paid off a few cards or you just never use them. You have one and it’s enough because you don't want to carry revolving debt anyway. To guarantee it, you cut up the other cards, but it’s better to keep them. If you have a life change (divorce, job loss, etc.) you may not be eligible for more credit if you need it.

It will also affect your credit utilization (CU) score - the amount of debt you have divided by the amount of credit available to you. If you have $3000 of debt and 2 cards each with a $5000 limit, your CU is $3000/$10,000 or 30%. If you cut up one card, your CU score is $3000/$5000 or 60%. Your credit score is lowered because your CU, which makes up 30% of your overall credit score, is higher. Keep the cards, charge something small every once in a while ($200 every 6 months or something like that) and pay it ALL off immediately.

Difference between Debt & Expenses: When You Feel Out of Control about Your Finances

Do you understand the difference between debt and expenses?

I know you're thinking, "duh... of course I know the difference between debt and expenses, debt is stuff like student loans, mortgage, revolving credit card debt. It's a total number, like $500,000."  And, "expenses are what we spend each month to keep our household going, like groceries, electricity, mortgage, CREDIT CARD MINIMUMS, babysitter, clothes, etc."

Ok, I know you know the difference between expenses and debt on a strict definition basis, but do you know how the difference affects your household and maybe even more importantly, your level of stress and civility with your spouse?

Many households make plenty of money after taxes each month. Both partners work super hard, barely have enough time to help the kids with homework and hardly ever take care of themselves. Sound familiar? Right, if you have "plenty of money" why do you feel like you're suffocating sometimes. Why do you feel so out of control financially?  Well, it's a little annoyance called LIQUIDITY.

Liquidity means that you have some money left over at the end of the month each month. It means you have a little cash stashed (not your emergency savings; that's for job loss, disability or financial catastrophe ) for when the toilet breaks, or you need four new tires. It's a rainy day fund.

Most importantly, it's knowing that you don't have to CHARGE those rainy day items as they come up. When you have to put little annoyances and emergencies on a credit card, you get an overwhelming feeling that you have too much debt and that your household is financially "out of control."

Debt and expenses are different.  Debt and liquidity are different BUT related.  If you charge your rainy day items, your monthly credit card minimums or consumer loan payments get bigger and that means you spend more each month servicing that debt and have even less (if anything) left over at the end of the month. You have more debt AND a liquidity squeeze.  You create a spiral of feeling out of control.

Having a little cash stashed for rainy day items stops you from having to charge them as they come up. It is a great anxiety reliever and will decrease arguments and stress between you and your partner (I guarantee it!).

You may or may not have too much debt and my article on calculating if you have too much debt can help you figure that out, but the suffocating anxiety, is generally due to a lack of liquidity. You can't muster a few hundred or even thousand dollars at a moments notice if something breaks down without having to charge it.

What do you do? Put together a small rainy day fund, kept in a savings or money market account. For a family of four in an urban location, $2-3,000 is my usual recommendation.  For a single person $1,500 is plenty.  Put your rainy day fund aside first before even beginning to tackle paying off debts. Why? Because when life throws you a tax bill, a broken fridge or a broken ankle with a $1000 deductible, you won't have to charge it and feel out of control. You have some cash around for these items and that will go a long way toward calming you down.

Keep me posted on how the number of fights over money go down once you're feeling less backed into a corner over your LIQUIDITY!