Boring, And Unrelated To Anything Cake-Wise!

Lounge By Annabakescakes Updated 9 Aug 2012 , 2:20pm by jason_kraft

Annabakescakes Posted 2 Aug 2012 , 8:20am
post #1 of 21

Unless you want to use your savings for cake toys! To save a TON of money, I want to encourage those of us with mortgages to pay extra payments. To show how much you can save this way, I am offering our own experience as an example.

We bought a $135,000 house a few years ago on a land contract. We put $10,000 down, and made large payments for 18 months, then got a 30 year mortgage for the remaining balance, plus tax, title and fees, a total of $118,372. Our credit was insufficient to get a 15 year.

We have had the mortgage for 10 months, and always make an extra payment, even if we can only do $24.02 (makes a nice even number) And once it was $600 (thank you extra wedding cake!) Our interest rate is 4.5%. I just obsessively entered all our extra mortgage payments into an online calculator, http://www.ajdesigner.com/mortgage.php it shows principle and interest only. We also have mortgage insurance, $106 a month. So far, we have made $2,938.04 in extra payments toward the principle, eliminating 17 months of payments, and $7,745.07 in interest. Additionally, we will save $1,802 in mortgage insurance, totaling $9,547.07. Essentially, the van we bought last week, cost us nothing! (and that is going to be paid off early, too!)

So, if I average out the extra payments, it is $244.84 monthly. If we make that exact extra payment each month for the life of the loan, we will save a total $65,286.03 off interest and mortgage insurance thumbs_up.gif and cut 13 years and 4 months off our 30 year mortgage. To put it in perspective, my husband will be 54, rather than 67. And I will be 39 again icon_wink.gif He will be 13 years or more before the age of retirement, and start putting our entire house payment toward our retirement fund, each month. Minus escrow for taxes and insurance, which you pay til you die, our payment is about $700 a month. So, if we don't make any money investing, and just save the sum of our original payment for 13 years and 4 months, (the time we would still be paying if we didn't pay it off early) we will have $112,960 in our fund when DH reaches retirement age icon_wink.gif (Which will buy a loaf of bread and a gallon of milk in the year 2041 icon_cry.gif )

Sounds pretty good, huh? Though I am sure we will make changes, make more money, make bigger payments, buy a new house, rent out our current house, invest our retirement funds.... It's just nice to see where our current scrimping is taking us!!

20 replies
manddi Posted 2 Aug 2012 , 1:57pm
post #2 of 21

That's awesome! Congratulations! So many people in this world are financially retarded so it's nice to see someone planning things out like this! So many people ask,"what's the monthly note?" not realizing that they will be paying said monthly note for the rest of their life!

jason_kraft Posted 2 Aug 2012 , 2:28pm
post #3 of 21

I agree that paying down your principal to get rid of PMI is a good idea, but interest rates for mortgages are so low right now it's worth holding on to the rest of that long-term debt as a hedge against inflation.

Look at the time value of the money you are using to pay down your principal early. If your rate is 4.5%, you are saving ~3.5% in interest through early payments (because of the mortgage interest tax deduction). So if you think you can beat a 3.5% after-tax annual return over the life of the mortgage, you are better off investing that money instead of paying off low-interest debt. Just 10 years ago savings accounts were paying more than that, and we are probably headed that direction again soon due to the likelihood of more quantitative easing from the Fed (basically printing money, which reduces the value of the dollar and increases inflation) to stimulate the economy.

Of course this is assuming you have a fixed rate mortgage. If you don't, I strongly recommend refinancing into one ASAP.

manddi Posted 2 Aug 2012 , 3:03pm
post #4 of 21

Jason,
You make an excellent point. For me, I think it's a mental thing. I Hate owing people money(even the bank) so I try to get things paid off as soon as I can. It's a nice feeling to know you own that car, boat, camper... Etc. I can't say house yet. The bank still owns our house! My husband and I bought a house last year with a 15 year loan but our plan is to pay it off in 7or 8 years.

Jess155 Posted 5 Aug 2012 , 7:37pm
post #5 of 21

Way to go Annabakescakes! Almost 2 years ago, we put all of our consumer debt (credit cards, home eq. loan, etc,) on a 3 year payment plan. Next fall, we'll only have our mortgage and our student loans. All of this while having 4 young children, a $25,000 international adoption, and one income. It can be done!

When we bought our home in 2005 (the peak of the housing bubble here - I know, stupid us!) the bank approved us for a $275,000 loan. We knew they were out of their minds, that payment would kill us. So we bought what we knew we could afford, a $150,000 house. Good thing we used our brain and didn't trust the bank. We could've lost everything.

Annabakescakes Posted 6 Aug 2012 , 3:10am
post #6 of 21

I never saw there any replies! I even went back and clicked on the thread and hit "watch"

Thank you for the support, those who gave it. I love saving money, and accomplishing what I set out to.

Jason: Its fixed, you'd have to never watch the news in your life to buy into an ARM. We do have several retirement accounts, and yes, I hate debt of any kind. I suppose if your house was paid off, you would take out a home equity loan line of credit to invest it? It's the same thing. I don't want to owe anybody, anything.

jason_kraft Posted 6 Aug 2012 , 3:36am
post #7 of 21
Quote:
Originally Posted by Annabakescakes

I suppose if your house was paid off, you would take out a home equity loan line of credit to invest it?



Absolutely, even HELs are in the 5% range, and if you can't beat a long term 5% return in your investment portfolio you are in serious trouble.

Quote:
Quote:

I don't want to owe anybody, anything.



There's nothing wrong with that point of view from an emotional standpoint, but if you're just looking at the numbers, paying off cheap fixed long-term debt early isn't an optimal strategy. When inflation starts ramping up both your assets and your liabilities (debt) will decline in value. If you have no debt, you will bear 100% of that loss instead of sharing the burden with your creditors.

Annabakescakes Posted 6 Aug 2012 , 3:45am
post #8 of 21

We will just have to agree to disagree. Debt is dumb.

manddi Posted 6 Aug 2012 , 4:07am
post #9 of 21

If we pay our house off in 7-8 years and the economy goes in the toilet, I realize that makes my house worth less to prospective buyers. God willing, I plan on living here for the rest of my life. Our house is not for sale so it doesn't matter what it is worth to anyone else. My point being, we would bear no loss in the value of our house going down.

Let's say we paid $200,000 for our house(I just picked a number out of the air). Someone could offer me $500,000 and I still wouldn't sell. That may be bad business but you can't put a price on happiness and my husband and I are both very happy here.

Jason, I'm certainly not trying to get in a financial debate with you. This is just my unemotional, thought through opinion. I'd rather have my home paid for. If the economy takes a nose dive and my husband gets laid off, we wouldn't have a house note to worry about. We want to own our home; not the bank.

jason_kraft Posted 6 Aug 2012 , 4:13am
post #10 of 21

Don't take my word for it. Here is an excellent article that goes over both the pros and the cons of paying your mortgage off early, including several tactics for early payoffs.

http://financialmentor.com/financial-advice/pay-off-mortgage-early-or-invest/7478

It's true that there are a few situations where an early payoff makes sense, but an overgeneralized belief like "debt is dumb" can be dangerous. To be clear I'm not saying your decision to pay off early is wrong, I just think it's important to be informed about the pros and cons.

One huge con is the lack of diversification. For example, let's say you have a $500K house with a $400K mortgage and $600K in other investments (cash, equities, bonds, commodities, treasury bills, etc.). Your total assets are $700K, $100K (or 14%) of which is invested in real estate (the equity in your house).

Now let's sell $400K of your other investments and use that to pay off the mortgage, so you have $200K left of other investments plus $500K of home equity. This means 71% of your total assets are tied up in your house. That huge percentage greatly increases your risk and ties your financial future directly to the performance of the housing market in your area.

jason_kraft Posted 6 Aug 2012 , 4:18am
post #11 of 21
Quote:
Originally Posted by manddi

If the economy takes a nose dive and my husband gets laid off, we wouldn't have a house note to worry about. We want to own our home; not the bank.



You can still have that sense of security without paying off early, just segregate your investments into a diversified portfolio dedicated to paying off the mortgage. Instead of giving that extra $100 to the bank, put it into your own portfolio so it can earn an average long-term return of 7-8% instead of saving you 3%. If you run into trouble, you can take the money from that portfolio to pay the mortgage, but in the meantime you are reaping the returns from your investments instead of the bank.

manddi Posted 6 Aug 2012 , 4:56am
post #12 of 21

Good point but that wouldn't benefit us much. I'd love to explain my reasoning but I can't think of a way to do so without posting our financial situation on the Internet...

traci_doodle Posted 6 Aug 2012 , 6:20am
post #13 of 21

I'm with Jason on this one. 4.5% isn't very high! However, I understand your desire to get out of debt. My family has a very large sum of student debt weighing us down (for now). It's more than most peoples' mortgages, and a much higher interest rate. Believe me, as soon as we can afford it, I'm putting every extra penny into paying off that sucker!

However, I wanted to point something out that you may be aware of, but it's good to know if you're not. When you make that extra payment, instruct the bank to put it DIRECTLY TOWARD THE PRINCIPAL amount of the loan. Don't let them put it toward interest. Make sure you make a separate payment for anything above the minimum payment, and give very explicit instructions on where this money is to go. You will save a lot more money that way!

scp1127 Posted 6 Aug 2012 , 6:32am
post #14 of 21

Traci makes a good point. Also, it's a good idea to know the exact dollar impact. I had a loan one time and they did not put the extra payments on the books correctly. For many people, they could get by with this. I sat in the office and threatened usury and truth in lending while I was dialing my friend, our local notorious attorney from hell. It got fixed that minute. But I'm sure they did it to all accounts.

And I agree with Jason. It goes back to the practice of highest and best use.

traci_doodle Posted 6 Aug 2012 , 6:42am
post #15 of 21

BTW, I do think it's awesome you've saved that money! I think a lot of people are spending more than they have, so it's refreshing to see someone use their money wisely! And having less debt is infinitely better than racking it up!

Annabakescakes Posted 6 Aug 2012 , 3:48pm
post #16 of 21
Quote:
Originally Posted by traci_doodle

BTW, I do think it's awesome you've saved that money! I think a lot of people are spending more than they have, so it's refreshing to see someone use their money wisely! And having less debt is infinitely better than racking it up!




We pay online, for free, and it is very easy to delegate where the money goes. Our actual payment is already in the payment field, and there are 2 additional blank fields, one for extra principle, and one for extra escrow. There is no way to pay additional interest! Which would be very stupid to do....

Maybe if people understood my background they could understand how I feel about owing people. I won't post it all here, but I was very poor growing up, and I had nothing. I didn't even have girl clothes! Hand me downes from my older brothers. And I lived with poor relatives and in group homes. I started my adult life as a high school dropout, efficiency apartment, and a job at Wendy's. Got married at 18, and we lived in a hotel. We eventually got to an actual apartment where I had my twins, then got on food stamps and WIC. I divorced him, got child care assistance, along with the food stamps, WIC, medical cards. And got a good cake decorating job, making more than I ever had in my life, $7.50 an hour!! Lmao! But I was getting my child support and I felt rich! But I always hated being on gov't handouts, and got better and better jobs, got rid of all the assistance, married a man who works, and started my own business! I could be doing better, but I'll eventually get there, and I don't want debt dragging me down. I had nothing, took a lot, and now I dont want to owe anyone, anything. Our retirement is fine, and I am only 32, so I'm really not worried about high risk wheeling and dealing to maximize it, at this moment. I am very proud of myself, and I don't care if other people would do it differently. We put as much money in our Roth IRA as we do toward our principle, and my husband has a company matched 401K. Then there is Social security, lol, that was joke! There will be no social security in 35 years.

traci_doodle Posted 6 Aug 2012 , 11:00pm
post #17 of 21

Well, you could have said you put a lot toward retirement as well. icon_smile.gif I think it's great that you've been able to accomplish so much!

scp1127 Posted 7 Aug 2012 , 8:14am
post #18 of 21

Anna, I should have said also how comendable it is to save and have a plan in this economy, which isn't easy. And any plan of saving and controlled spening is good.

What jason proposed is what we all learn in money and banking classes in college about manipulating money to its potential, but it doesn't feel as good as getting the roof over your head secure. In this economy, people who have spent their discretionary income on paying down their mortgage have essentially lost every penny of that investment with lower property values. Real estate is no longer a safe investment.

We were aggressive in paying down and keeping our mortgages low, but in three years, our $750K house has a house in the neighborhood that is similar (smaller and less land, but will still nosedive our property) at about $200K. The other house on the water has maintained its value, but has not grown. We now put our money in retirement, investment, and our businesses... all of which are showing growth.

If anyone purchased their home a few years ago when the prices were high and now the house is worth less than owed, it is better to treat that house as shelter and pay the least because chances are that you will not recoup your investment for a very long time. This is why so many people are letting their houses go back to the bank even though they are not having trouble making the payments.

CraftyCassie Posted 9 Aug 2012 , 4:47am
post #19 of 21

Great job! Just be careful that you don't pay it off too early. That can actually hurt you credit score. My nephew paid his truck off by making extra payments each month; bank won't give him anymore credit because they didn't receive as much interest on his loan. Pitiful!

Annabakescakes Posted 9 Aug 2012 , 5:06am
post #20 of 21
Quote:
Originally Posted by CraftyCassie

Great job! Just be careful that you don't pay it off too early. That can actually hurt you credit score. My nephew paid his truck off by making extra payments each month; bank won't give him anymore credit because they didn't receive as much interest on his loan. Pitiful!




It really is pitiful. And i understand what you are saying. But the point of a credit score is so you can have more debt. I would like to get to the point where I will have no debt again. I went until I was 30 with zero debt, except student loans. And now I have a mortgage and a van payment! But, once I am out of debt again, it won't matter if people will extend credit, because I don't want it. I paid $200 cash for my first car, then $600, then $1000, then $2,600. Since I want to look professional, and I have reliable transportation, I paid $2,000 down for a $9,000 van with power everything, no scratches or dents, with shiny paint, lol (first time ever, lol!) we have a 3.5% on that. I do see the importance of credit though, at times. So we could buy a house, I brought my husbands credit score up to 724, from 428, in 3 short years. my next vehicle will be cash again, but we paid $17,000 to build a bakery, and we are low on funds. I am still putting nearly everything I make back into the bakery, since $17,000 doesn't get a lot this day and age!

jason_kraft Posted 9 Aug 2012 , 2:20pm
post #21 of 21
Quote:
Originally Posted by CraftyCassie

Great job! Just be careful that you don't pay it off too early. That can actually hurt you credit score. My nephew paid his truck off by making extra payments each month; bank won't give him anymore credit because they didn't receive as much interest on his loan. Pitiful!



That's not how credit scores work, the amount of interest you've paid on a loan has no bearing on your creditworthiness. If your nephew has been denied credit he should order a copy of his credit report from the 3 reporting agencies to find out what the real reason was.

In fact everyone should be checking all three of their credit reports annually, you can order your report for free once every 12 months from each reporting agency.
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm

The link below shows how your credit score is calculated. The big factors are whether you pay on time, total amount owed, and total available credit, but opening new accounts and even recent credit inquiries can negatively impact your score. Having too few credit accounts can also hurt your score, this may be what happened with your nephew.
http://www.myfico.com/crediteducation/whatsinyourscore.aspx

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