Mortgage Interest – How to save thousands of dollars

If you’ve ever purchased a home by financing a mortgage you’ll remember the day you closed the deal signing a stack of documents high enough to prop up the short leg of the couch. One of those documents is call a “Truth-In-Lending” statement. It shows the amortization schedule of your loan (the breakdown of principal and interest) and the true cost of the money you’re borrowing. The truth printed on the bottom of the statement is a sobering fact. If you take the full 30 years to pay off your mortgage you will pay approximately two and a half times the amount of your original loan. The $100,000 you financed for your home will cost you about $250,000.

Paying off your mortgage early guarantees you’ll save thousands of dollars in interest. Consider this: The monthly payment for a 30-year mortgage of $130,000 @7.5% is $908. Increasing the monthly payment to $1,205 will pay off the mortgage in 15 years. An additional $287 per month will zero out a 30-year mortgage in 15 years!

Every homeowner wants to save thousands of dollars in interest. The question is: Whats the wisest way to accomplish it? Using the above example, one approach would be to send the additional $287 payment to the mortgage company each month. While this strategy will certainly accomplish your goal of an early payoff, once the money is applied toward your loan, it is no longer available to you (until you sell your home). The one who benefits most from this strategy is the mortgage company.

A better strategy may be to make your regular house payment and deposit the additional $287 each month into an investment account that you are comfortable with. When the balance of your savings/investment fund grows equal to the balance of your mortgage, you can use the money to pay off the mortgage in full.

The advantage of this strategy is that you maintain control of your money in an account that can be accessed in the case of emergencies or investment opportunities that present themselves. The potential also exists for earnings on this account to exceed the interest rate you are paying on your mortgage. The goal of savings thousands of dollars in mortgage interest is still accomplished without sacrificing your financial flexibility.

A reminder…Before investing money, be sure to determine your personal risk tolerance, goals and objectives. Always read the prospectus and consult with a trusted professional adviser before making investment decisions.

Making the Most of Windfall Dollars

You hear the familiar squeak and slam of the mail slot by your front door, 3:40 PM, right on schedule.

Today your friendly postal person has left you a bundle. fliers advertising everything from carpet cleaning to pizza delivery. Your issue of “Origami Monthly”, bought in a weak moment from a neighbor kid selling magazines sits on top the electric bill. A letter from your local stock broker inviting you to call her for information about recent market changes and investment opportunities. And your credit card statement reminding you that the balance on your card is $4,000.

What’s this? A letter from an attorney’s office? After running through the mental list of people who might want to sue you, you open it up. Whew. It’s not a notice of intent to litigate. It’s a letter informing you that your rich aunt died. (We know. It’s usually the rich uncle who dies in these stories. But this is just a make believe paragraph to set up the financial illustration. So run with it, ok?)

Stapled to the letter describing your aunt’s warm sentiments toward you is a check for (what a coincidence!) $4,000.

Staring back at you from the pile of mail on the table are your credit card statement and the friendly invite from your local stockbroker. $4,000 in your hand. You could pay off your credit card. Or you could give a boost to your retirement by investing the $4,000 in a stock fund. That would be better, right? Not in this story. (Not in real life, either.)

LaunchYear 1Year 5 Year 10

After 10 years, your debt has grown to over $20,000 dollars. That’s over $8,500 more than your stock investment. But you’re actually further behind. When you sell your stocks, you’ll pay as much as 30% in capital gains tax.

When you received that $4,000 check in the mail you had enough to pay off your credit card in full. By choosing instead to invest at 12% after ten years, even if you sell all the stock and pay your tax on the gain, you don’t have enough to pay off half of your credit card debt.

The moral of the story? To make the most of your money, eliminate your credit card debt!

Stocks @ 12%/Yr Credit Card @ 18%/Yr
Launch $4,000 $4,000
Year 1 $4,480 $4,720
Year 5 $7,049 $9,151
Year 10 $12,422 $20,935

But I got it on sale

Hey, look at the great deal I got on this 123-piece socket wrench set!”…”But we don’t need a 123-piece socket wrench set!”…”But I got it on sale!”

Does a sale always save you money? Not if you’re spending money on an item you don’t need. Even if the bargain price was 90% off a $100 gizmo, you still spent $10 on an item you didn’t need. Bottom line: a bargain is a bargain only if you’re saving money on an item that is already in your budget or was a planned purchased.

This is good to remember when considering department store credit cards. Even though department store cards sometimes offer a 10%-20% discount when you use their card for purchases, it often entices you to spend money on items you weren’t planning to buy (like the 123-piece socket wrench set). Even at a discounted price of 15%, if you don’t pay for the purchase in full on your next credit card statement (and the department store prefers that you don’t), your 15% savings disappears. An 18.9% finance charge on a running credit card balance quickly exceeds the initial sale price you paid. In short, your 123-piece socket wrench set isn’t a bargain anymore. In fact, the finance charges have made it more expensive than the original sale price.

If you don’t need a sale item, don’t buy it. Keeping the dollars in your pocket is a better bargain.