Be Brave Not Safe

When acquiring a mortgage (whether for a new home or refinancing an existing one), strongly consider the available options. That is, don’t assume a 30-year mortgage is the “way to go.”

In viewing mortgage rates available (at time of writing) we have the following “fixed rate” options to consider at my bank:

• 15-year at 3.5%
• 30-year at 4.375%

Let’s assume the home we wish to acquire (or the remaining balance of the one we wish to refinance) is $200,000.

The 30-year mortgage would require a monthly payment of $998.57 and the 15-year would require a monthly payment of $1,429.77.

Some may say: “Ouch, the 15-year option “costs” too much. I can’t afford that.” Perhaps the monthly payment is too high for the budget, but the “costs” are actually LOWER for the 15-year mortgage. Consider this:

If we add up the total monthly payments for each of the above options, we will save a SIGNIFICANT amount on the 15-year mortgage.

• 30-year mortgage) total of all monthly payments = $359,485.20. This option “costs” $159,485.20 more than the price of the home!
• 15-year mortgage) total of all monthly payments = $257,358.60. This option “costs” only $57,358.60 more than the price of the home and, more importantly, it costs $102,000 less to acquire the home than with the 30-year option above.

Note: To simplify matters, I’ve excluded the points paid at closing (which are often lower for 15-year mortgages), as well as tax and insurance.

The key point: we can save hundreds of thousands of dollars by selecting a shorter mortgage period. And, we can save further by accelerating payments. That is, if we are in a mortgage for which there is no benefit to refinance we can dramatically shorten the loan period (and reduce finance charges / costs) by increasing our monthly payment. Building on the prior post on eradicating debt, once the home mortgage is at the top of the prioritized “kill list” we can take the available cash that was previously being applied towards other debt and apply it directly to our home mortgage.

Consider this new found knowledge when refinancing. That is, don’t be coaxed into refinancing a loan that may have 15-20 years on it, into a lower interest rate AND extending the mortgage out another 30 years. While the monthly payments will be (far) less, the “costs” of acquiring the home will go up. An exception, of course, would be if this is part of your debt eradication plan and you have committed (to yourself) the difference between your old and new monthly (mortgage) payment towards higher interest debt.

Hope you found this simple math equation helpful towards shortening the distance to your financial freedom.

For more in-depth guidance on becoming financially fit, consider this recommended reading (if you haven’t already done so).

After receiving an email notification about some “free money” I had just earned, I felt compelled to write this post.

As outlined on the “Cool Tools” page of this blog…Many credit card companies offer rewards (miles, cash back, points, etc.) on purchases we make. Their major goal: Quite literally, to “trick us” into racking up balances on our credit cards so that we pay hefty interest-related fees. The bank’s profit motive.

We can play their game to OUR advantage – if, and only if, we are highly disciplined.

If you have not yet eradicted debt, or are not a disciplined credit card user you are encouraged to first learn how to eradicate debt, and put this post away for another time.

For those with demonstrated discipline, read on and enjoy the free money.

Our approach is to flow ALL of our purchases (I mean EVERYTHING possible) through our “cash back” credit card. This includes, but is not limited to: groceries, gasoline, cell phone bill, gym membership, heating oil, Netflix, auto insurance, college books, etc. However, there are a few caveats that we will not compromise on:

1. We will NOT do business with a credit card company that charges an annual fee. There are no-fee cards offering cash back rewards (one is suggested below).
2. We will NEVER pay interest. That is, we MUST pay the entire balance off each and every month — on time, absolutely no exceptions.
3. We don’t use the card when there is an additional fee imposed on us, by the merchant we are doing business with.

The overriding principle: We shall NOT pay an added expense for the use of money.

We’ve used the Upromise card for years. The “basic” cash back reward is 1%, higher for certain purchases defined in their agreement. They happen to offer a program which funnels our cash back rewards into a 529 plan (a tax free continuing education investment account with Vanguard). This kills 2 birds with a single stone: A painless way to earn “free money” on purchases we were going to make anyway AND we are investing in our children’s college education.

Some may ask “What is the point? 1% is so very little.” Certainly, taken alone and only considering the “free money” earned on a monthly basis it isn’t much. Or is it…As demonstrated in prior posts, when we ONLY look at the individual / monthly occurrence of an example (to save or earn) it doesn’t seem like much. We’ll again use the X (value earned, in this case, on a monthly basis) times 12 (months) times 10 (years) formula to see how we are doing with this example.

Let’s say that the typical monthly household expenses we channel through our credit card averages $2,000. The cash back reward is $20. Running this through our formula we earn $2,400 over 10 years. For some this number is on the conservative side and it doesn’t even consider other (non-monthly) expenses that could flow through the card (clothing, auto maintenance and repair, the extraction of wisdom teeth, etc.). And, we need not stop here: what about business expenses?

The point (made in several posts) is that, we can take many “seemingly” small steps to earn (raise the bridge) or save on costs (lower the water) towards our financial freedom. Take any one of these examples by themselves, considering only a single (monthly) occurrence, and they may not “seem” like much. Take them all in their entirety, considering the 10-year timeframe and now we are creating momentum!

Would you leave $2,400 “on the table?” I wouldn’t.

As a reminder, for those lacking the discipline to bring their credit card balance to zero every month: “Please don’t try this at home!” For those with discipline: enjoy some free money!