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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Getting Outta Debt pt 6- Airing Dirty Laundry…Debt

This is a republishing of a post that’s part of a series on “How I Got Outta Debt” written back in 2009 when this blog was on Blogger. I know I keep saying it but this is just as relevant today as it was yesterday. If you are in the position to do so I hope that it inspires you to take control of your finances and your life.

 

Laundry is hung to dry above an Italian street.

Laundry is hung to dry above an Italian street. (Photo credit: Wikipedia)

I’m back with the calculations on all my debt listed in part 5 of this series. I’m going to show my debts, the amount of time it would have taken me to pay off the debt based on the payment amount and the total amount I would have paid doing it the way most folks do/the way the creditors want you to.

What was/is their plan? To pay the minimum payment for the maximum amount of time. This results in you paying the maximum amount of money on the money you borrowed. Translation…it’s more money that you have to work for to make these payments…forever. (it will feel like that) Here is the lowdown and remember APR is the interest rate:

 

         DEBT/ AMT/ PAYMENT/ APR/ PAYOFF TIME/ TOTAL AMT PD
  • Visa: $2371.53, $50 per mo, 12%, 65 months, $3250.00
  • H.F: $1000.00, $19 per mo, 9.9%, 70 months, $1330.00
  • Car: $3571.69, $245 per mo, 7.9%, 16 months, $3920.00
  • Capital One: $984.43, $19 per mo, 9.9%, 68 months, $1292.00
  • BoA: $4588.00, $51 per mo, 9.52%, 159 months, $8109.00
  • Perkins: $2027.15, $40 per mo, 5.00%, 58 months, $2320.00
  • Direct SL: $5786.44, $52.52 per mo, 4.22%, 140 months, $7352.80
  • Mortgage: $48175.00, $413.06 per mo, 6.25%, 181 months, $74,763.86

The total amount paid when everything is paid off according to the normal way of doing things…$102,339.86!!!

 

That $102,339.86 figure does not even include what I already paid when I had my head up my butt! Remember I mentioned that I quit playing around and got serious with this July of 2001? Well of course based on the payoff time, I would have paid almost all of these off by now (November 2009).  However, I’d still be paying on the Direct SL (Student Loan), Bank of America and the mortgage. That’s $518 on top of utilities, food, gas and whatever else for everyday living. That might not seem like much but when your income has been slashed by 50+ %,  which it had been at the time I first wrote this post, that’s a heck of a lot of extra money to have to come up with.

Also when I was writing this post, I had heard on YouTube,  a news clip from MSNBC that credit card companies are trying to jack up rates ahead of legislation going into effect to stop these practices. Well, credit card companies have always had this power and all they’ve had to do was give you a 15 day notice which is one of the reasons why I chose to get rid of them first.

In the next posts, you’ll see the RDRP- Rapid Debt Repayment plan, better known as the debt snowball plan in action.  I used that same $889.58 to not only pay off all debt except for the mortgage but to pay off all debt including the mortgage. Yes folks, it is possible to pay off all of your debt and not take the rest of your life doing so.  And you’ll see how you save not only money but your sanity as well.  But you’re gonna have to check back in to this series to see how I did it.

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