Housing the Right Way for You

Who Listens To The Little Guy?

Who Listens To The Little Guy? (Photo credit: infomatique)

 

I haven’t followed the status quo thinking regarding finances because for a long time. It seems to me like the deck is stacked against you if you follow the road that’s been laid out. Then the road is re-routed and the net cut away, and you’re left dragging a mountain of debt around for decades. I’m not a Christian but I know for a  fact the Bible says “The borrower is a slave to the lender”. Not the position I want to be in, Christian or not.  Been There Done That, got the t-shirt in different colors.

The old paradigm that our parents operated under is no longer viable for anyone 65 and under and the sooner you realize this the better off you’ll be.

The main one and the biggest expense…housing. What is it they always tell you? Stretch a bit to buy a house a bit bigger than you need so you can grow into it, have room for the family gatherings, traveling visitors, etc, in the best school district and it’s an investment that increases in value.

Excuse me while I find a shovel for all that poop. 

Are you having family gatherings every day? Probably not. As a kid I know some of y’all remember either your grandparents, parents, or somebody in the family who had the “living room” or “dining room”  with the plastic covered furniture that you only pass through to get to the main area of the house, only gets used 1-4 times a year and you betta not have your behind playing in there?!!  Why call it a “living room” or “dining room”?!  There was no real living or dining being done in here on a daily basis. Not even part-time living and dining.  Sorry but this never made any sense to me as kid and I was not paying any bills so it made absolutely no sense to me when I was “encouraged” to leave home at 18-19 yrs of age having to live on my own.

Out of town or overnight guests every day? Probably not…and at that point they aren’t guest anymore and need to be contributing to the household. Again makes no sense to buy to have all that space because you can’t get a discount on your mortgage payment and property taxes based on this unused space for most of the year.

Buy a house in the best school district. Another play on your emotions. Your house in the best school district is no guarantee that your child is going to learn anything. Besides,  most if not all schooling teaches kids to be drones and makes you a slave with no time to talk to,  and teach your children about the way life really works. Then, in turn they become slaves because they don’t know what the heck is going on continuing the vicious cycle.

So, the younger generations (after the World War II generation) have been encouraged to buy too much house and renovate to have too much house with the promise of ever rising home values which they forgot to tell you meant higher prices for you. Higher prices usually means higher upkeep, higher property taxes etc.

This ideology was probably ok (emphasis on “probably” because I have my doubts that it was ever ok even for those it appeared to benefit) in an era of darn near cradle to grave job security with pensions and paid healthcare in retirement. Now unless you’ve been living under a rock, that employment scenario is rare nowadays.  And if you do manage to find it, trust me in 5-10 years it will disappear one way or another. That’s a whole ‘nother post. 

Alright, I’m not saying you should live somewhere that you are scared to go home each day but all the above reasons given to us to buy a house are IMHO the worse reasons to buy or even keep a house if it’s draining your budget. A house should not be bought as an investment like a stock or mutual fund. It’s not nor should it have ever been put in the same category. The stock market is basically a legalized casino. Most sane folks don’t take their bill money down to the casino every month.

What I am saying is a house should be first and foremost a safe place to lay your head and your place of operation to nourish and replenish yourself physically, mentally and spiritually. That’s the investment that propels you into a lifestyle which allows you to get further along your life path.  It sounds like the same thing but here is the difference. You set the value of the investment by knowing your values, not the financial talking heads who are not paying your bills. But it does take courage to get off the beaten path.   

How do you set the value? You buy with your life goals that you have determined in mind with reality firmly in mind. Choices made now have a huge effect on what the future will look like. Now this means you will have to do some work.

Is it important to you to have a place that you can show off but you are never there to enjoy it because you and your SO (significant other)  have to work 80-100 hours a week to make the mortgage and upkeep? Or would you rather have more time, cash and have a place that you and everyone in the household can clean up in an 1 hr or so?

If you are already in a house, are you straining to live every month? Is it important to keep up appearances or would you rather sleep well at night? What message do you want to teach to your children if you have any especially if they are young teenagers or young adults?

Only you can and should be the determinant of what your values are, meaning what’s important to you. What’s important to me might not be what’s important to you. I don’t know for sure but I would not be surprised if my house today if I wanted to sell it, might be worth less than the price I paid for it including the interest on the mortgage and “improvements”. That does not matter to me because the skills I have learned during the 13 years I’ve been here,  the peace of mind and quality of life gained over the last 7 years being totally debt free are priceless.  Has it been easy, heck no.  But I got some of my life back that was lost a long time ago. Also, I’ve been able to significantly lower the stress levels due to happenings within my household, mine and my husband’s family of dealing with elderly parents during that time because debt was not hanging over our heads. My house is small by today’s standards, the standards when I bought it… it’s a 2 bedroom/1 bath, I have to go outside to get to my laundry room and I have no garage. I mentioned the price and interest here.

Told ya, I don’t follow the status quo.

 

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Gettin’ Outta Debt pt 9- Paying off “The Death Pledge” aka The Mortgage or any Large Loan

“Death Pledge”.  No this is not a scene from “The God-Father” but that really is what the term “mortgage” means. However,  I like to apply that term to all debt.  Most people back in the day worked until they died and still may not have paid the loan off hence the name “Death Pledge”. With a name like that and from the looks of the guy in the pic above, a mortgage or any large debt is something I don’t want to have anymore. And if I had to get it, let it be as small as possible and more importantly get that *&$**  off my back ASAP!!!

In the final post of this series I will show you using my mortgage figures how beneficial it is to you to pay off “The Death Pledge” as soon as you can. This info can be applied to any large loan. Yeah I know,  the financial experts tell you to invest that money in the stock market or whatever is the hottest investment going around. And that the market historically returns X %. But what they don’t like to tell you is that paying off your debt is a guaranteed return on your money and the less debt you’re carrying like the guy in the pic above,  the better off you are in case of an unexpected change in your financial status like a job loss.

WARNING: This post has boring figures in it and is a tad long but it will save you big money in the future!!!

If you are in the position and desire to pay off the mortgage, make sure whatever extra you are sending is clearly marked “For Principal Only” in the memo section if you are paying by check. It’s even better if you write out a separate check from your regular payment. If you are paying online, look for the section marked “Additional Principal” or something like that and input the extra amount you are paying. Also check the balance with the bank after you’ve made each and every extra payment.

Why am I telling you this? If you don’t do this the bank is not going to automatically assume that you want to pay down your debt at a faster rate and will apply that extra towards future payments. Now you may think well that’s ok, it’s paying down the debt. In a way you are correct. However, the amount of interest especially on a mortgage or any loan for that matter, is on the front end of the loan. This is why you have been making payments for 20 years and still owe just as much as the original price of the house even though it’s 20 years later. What you’ve been paying all that time is mostly interest and very little towards the principal. This is magnified on a 30 or more year loan. Take a look at your amortization table and you’ll see what I mean. If you don’t have one there are calculators with amortization tables on the Internet. I believe at one time the mortgage company was required to give these out but in recent years if you wanted one you have to ask for it. I think too, since they don’t have to do it anymore, some mortgage holders charge for the table. Once you take a look at yours for your loan, you’ll see why they don’t want to provide you with one. The faster you pay down the principal the less money they make in interest.

On a mortgage, the interest is calculated on the remaining principal balance. The larger the balance, the larger the interest portion of the payment is. That’s less money going toward paying down the principal. Remember, principal is just a short cut word for the original amount borrowed or original sales price. Here’s an example from the amortization table on my retired mortgage.

  • On the $48,175 beginning balance on the loan the 1st payment due on August 1st, of $413.06. $250.91 of that payment is going towards interest, the remaining $162.15 goes toward paying down the principal. Principal balance now is $48,012.85.
  • The interest charged on the next payment is figured on the balance of $48,012.85. Now if you make extra payments and for the sake of ease, that total payment is $1,239.18 ($413.06 x 3) but you don’t specify the extra $826.12 is for “principal only”, what they are going to do is apply that amount to your next two payments after the current payment and tell you your due date is November 1st. What this means is you will have paid $499.29 ($250.07 & $249.22 respectively) in interest and only $326.83 ($162.99 & 163.84) pay down of principal. Principal balance $47,686.02. Notice how little the pay down of the principal decreased but you’ve made a $1,239.18 payment.
  • By specifying “for principal only” application of that $826.12 extra payment, the new principal balance that interest is calculated on is $47,185.73. That does not seem like a lot from $47,686.02, a difference of $500.29. But here’s the kicker. $988.27 is applied to principal pay down and only the $250.91 is paid in interest.
  • By not doing this the bank makes $661.44 off of you on this one transaction. Multiply that over the life of the loan and it becomes apparent how profitable it is for folks to remain in debt and not apply extra payments properly.

I had a 15 yr mortgage.  On a 30 year mortgage, the pay down of principal is at a slower rate thereby more interest is paid out. The interest paid will be higher the larger the loan.

The fantastic thing about this, on a fixed rate 30 yr mortgage, by paying $25-$50 extra each month, the payoff  can be reduced by as much as 5 years. One extra mortgage payment either as 1 payment or divided up throughout the year can reduce the payoff down to 18 years. This saves tremendous amounts of interest.

Please don’t pay for anyone to set you up on a “bi-weekly payment plan” or any of that other mess. There is almost always a fee involved, many times a setup fee plus a monthly fee and you are locked into those terms. Take that fee and apply it to your principal yourself. And if for some reason you don’t have the extra you are still in compliance with the terms of the loan by making your regular payment.

Think about the day when you don’t have to make that payment anymore.

I hope this helps.

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