Break Life

Break Time! Financial Advice…

Howdy! This time I’ve decided to share something from others…not my own blog, or writing…for you, my readers because I think the advices were really good. The question was posed by a Millennial who’s wondering what financial aspects to consider as he’s venturing into buying his first house. The answers and attribution are below. I’m sharing these because I think they were sound advices and I practiced the same over the years as a first-generation immigration with extremely little money and zero network of help/mentoring. I really appreciated their time to share their advices to the upstart millennial…hope he heeds and succeeds. So, here they are (from a couple of responders)…

So the questioner (millennial) asked: I’m buying my first house. What are some strategies I can use to payoff my mortgage early?

Oooh, right there my flag went up and I rushed to respond, but there were others who responded better than I could have…here are my selected responses with attribution…Wonderful to see folks helping folks despite wide generational gaps and cultural-societal-political beliefs.

Responses (uncurated):

Rob Gebby
DONT pay off your mortgage! DONT pay extra payments! (Unless you want to pay ahead a couple months “just in case”. Instead, SAVE UP 6 months of cash needed to cover ALL your bills. THEN start paying off all of your debt EXCEPT your mortgage. Why? Because your house is going UP in value while your mortgage is going DOWN and your wages are going UP. Your interest is tax deductible and there are MUCH better uses for your money! (I will explain in a minute but first I want to give you some advice.)

NEVER take a second mortgage. It sounds great to use equity to buy a car since the rate is low and the interest is deductible yet the term of the loan is 20–30 years and you will only keep the car 3–5 years (unless you are REALLY smart….smarter than me) and keep your cars until they fall apart. Remember, houses generally go up in value while 99.9% of cars ALWAYS go down in value.

Always pay your credit cards IN FULL each month. Dont buy anything on them if you cant afford to pay off. INTEREST IS THE DEVIL! Use your credit card for EVERY single purchase you make. Get cash back rewards. Use the card that gives you the best rewards. If you already carry a lot of debt, DONT put extra money into your mortgage. Put ALL of your extra money into paying off the smallest credit card, then when it is paid off, the next smallest, etc until your house and car are your ONLY debt. Then focus on those. Credit card charge 12%-25% interest and it isnt deductible. INTEREST IS THE DEVIL! Pay those cards off (but DONT close them, it will hurt your credit score). Just dont use them unless you can pay them off each month and try not to buy things that you dont need. Limit “treating” yourself.

Now, once you get have 6 months of saving in the bank and all your debt is paid (EXCEPT the house), START SAVING the maximum amount you can in your 401K and your Roth IRA. You are probably paying 4% or so (3% after your tax deductions) on your house while your 401K (historic average) will earn 8%-12%. Your money is MUCH better working gaining big interest than paying off a tax deductible loan on a property that is rising in value anyway. You buy the house for $200,000 and in 30 years it will be worth $400,000 even though your mortgage payment NEVER CHANGED! Use the money that would pay off the mortgage to earn BIG BUCKS!

I can tell you this is NOT just my advise. There use to be a program called “Turning Debt into Wealth”. I purchased the program and reviewed it and this was THEIR plan. I returned it for a refund because I was already doing this anyway.

Joe Parsons
Paying off any amortized loan, like a mortgage, is simply a matter of math. If you have a 30-year loan for $225,000 with a rate of 5%, your monthly payments of principal and interest will be $1,207.85. After five years of making this payment, you will have paid the balance down to $206,615.

If you increase your payment, you’ll pay the loan off faster. Paying an even $1,300 per month—$92.15 more than the scheduled payment—you’ll cut the term to 21 years. If you decided you wanted to pay your 30-year loan off in, say, 15 years but didn’t want to commit to the higher payment of a 15-year loan, you’d pay $1,779.29 each month.

You might ask yourself where the money would come from to make these larger discretionary payments. Aside from the obvious, like packing your lunch instead of eating out during the week and eschewing a daily latte for $3.50, you could find money in other places.

If you expect to get a tax refund at the end of the year, adjust your withholding to increase your take-home pay. A tax refund simply means that your employer took too much out of your check each pay period. When you file your taxes, you’re getting your own money back—without interest, of course. A better strategy is to adjust your withholding to increase your take-home pay, then apply that money to your mortgage payment. The reason this is better than applying your tax refund to your loan balance annually is that you’ll reduce the amount of monthly mortgage interest you pay by adding to your regular payment each month.

If your down payment is less than 20%, you will be paying some form of mortgage insurance, commonly referred to as “PMI” for Private Mortgage Insurance. PMI is a way for lenders to manage their risk when they give you a loan for more than 80% of the home’s value. If you bought your $250,000 home with a 10% down payment, you’ll pay monthly PMI of between $56 and $206, depending on our credit score. When your loan balance reaches 80% of your home’s market value, you’ll be able to drop the PMI. Different lenders have their own policies and procedures for dropping PMI, but you can expect at a minimum to have to pay for an appraisal. Dropping PMI should not involve a refinance, unless rates are significantly lower than what you have. When you no longer have PMI, add the money you no longer have to pay to your regular mortgage payment to shorten the loan’s term.

You may have opportunities to refinance to improve your rate. Even though a lower rate will carry a lower monthly payment, take advantage of the lower rate to shorten your loan’s term. Keep making the same monthly payment that you’ve been accustomed to making with the old loan.

If your rate is 5% and your balance is $200,000, dropping your rate to 4.25% while making the same monthly payment as before would cut more than two years off the term of your loan.

Please note that none of these approaches to paying off your mortgage involves making personal sacrifices. They all involve reallocating and adjusting your income to apply to your mortgage payments. The reason I stress this method is that most people are not very good with self-denial for any extended period.

With all that said, I’ll mention that paying off a home loan early may not be the best financial decision. Even though rates have gone up over the last few months, rates are still lower than the rate of return most people can get on their invested cash. Before allocating surplus cash to retiring a mortgage, it is a better financial decision to fully fund your retirement fund—especially if your employer matches your contributions. That portion they pay in matching funds is literally a 100% rate of return, plus the rate of return on the retirement fund itself.

If you carry other debt, allocate available income to retiring those balances before paying extra on the mortgage. The chances are that the rates are much higher than your mortgage. I have had many clients over my decades-long career who wanted to get a 15-year loan with its higher payment, but were carrying tens of thousands of dollars in credit card debt with double-digit interest rates. I have been able to persuade them to apply the extra discretionary income into retiring that very expensive debt, then funding their retirement accounts, THEN applying additional discretionary income to the mortgage.

In the long run, the goal is to build wealth. Paying off the mortgage may not be the highest priority to accomplish that.

I hope this is helpful—and please accept the compliments of a card-carrying Old Dude for thinking over the long term at such a young age!

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