Lower Your Mortgage Payment without Refinancing

Refinancing Isn’t The Only Way to Lower Your Mortgage Payment

By now, you have probably heard of refinancing your mortgage. This is where, when interest rates drop significantly, you essentially trade in your old mortgage for a new one. The downside is that it costs you quite a bit of money. You have to pay for an appraisal and fees and closing costs just like you did with your first mortgage. It can result in you having money on hand for needed repairs or debt payoff, and a lower overall payment, which makes it overall a good idea when interest rates are significantly different than they were for your first mortgage. This is a current trend in today’s market.

Recasting your Mortgage

If your current mortgage rate is pretty good, there could still be a way for you to lower your mortgage payment. If you have a large chunk of cash sitting around not gaining much in interest, putting that money to your mortgage might be a good option. First, ask your mortgage holder if they offer what is called a mortgage Recast option, and if they do, ask them if there is a fee. I have Wells Fargo, and they do not charge anything. Recasting a mortgage is when you make a very large principal payment, and as a result, the mortgage lender re-amortizes your remaining balance. This means that the loan length and interest rate stay the same, but the payment gets lowered because you have decreased how much has to be paid off over the remainder of the loan years. For example, I currently owe about $123,000 on my mortgage. I pay $883 per month toward principal and interest, not counting the escrow (taxes and insurance). If I pay a one time payment of $50,000, my payment drops to $374 per month for principal and interest. This means I am obligated to pay over $500 less per month, which can be a life saver in case of hard times later. If I continue to pay my normal payment after making that large principal payment, my loan will be paid off years earlier. Or, I could invest that extra $500 per month, potentially making tons of extra money over time. That same $50,000 is only earning about $20 per month in interest in a savings account right now, so it seems like a good time to consider putting the money somewhere that it can at least save me money in interest.

What to Consider First

I would only consider doing this if you already have a significant emergency fund saved up. If you find that you still have a large chunk of change that isn’t earning you significant interest, it could be a good time to put that money to work. Remember, if money isn’t at least earning enough to offset inflation (at least 2% or more), then it is essentially losing value over time. Better to put it somewhere that either earns you more (investing), or saves you more (decreasing debt).

Take Aways

There is more than one way to change your mortgage payment, if you have significant savings in the bank.

Always make sure you have an emergency fund that is easily accessible before putting large sums of money into investing or recasting a mortgage, or any other endeavor for that matter. Security is essential.

Talk to your financial advisor about where to put extra savings, and consider recasting your mortgage as a possibility that may not cost you anything except the payment you put toward your mortgage.

Financial Tips for a Merry Holiday Season

The Holidays and Money

Do the holidays fill you with a mixture of emotions, from joy and excitement, to dread and anxiety? If your finances tend to get out of control during the season of giving, you aren’t alone. Even the most disciplined of us can sometimes let the joy of giving override our sense of frugality. People tend to think more in the short term, than what will happen to us later on if we make the wrong decisions now. The fact that monstrous debt is not only a reality for most people in developed nations, but even expected, is case in point. We are given credit cards and told to spend as we will. We graduate from college with mountains of debt. We buy a house above our means because the mortgage company and “keeping up with the Joneses” says we should. Why should the holidays be any different?

Wouldn’t it be great if there was a way to make the holidays less stressful, at least financially? It turns out, there are a few tips that could help, but they take some planning. Like almost everything when it comes to money, looking ahead will get you further than spur of the moment approaches. One idea would be to set a yearly holiday budget. Then, open a savings account and set up automatic withdrawals on payday to be put into that account through the year. It doesn’t have to be much. If you get paid every 2 weeks and put aside $10 each time, by the end of the year you would have over $200. That would sure beat having to take it all out of one check. If you put it into a high yield savings account, you could even have a few dollars of free money (minus taxes) to top it off.

If you are a little more adventurous, and want to make potentially a little more money with your money, you could put that same amount into the stock market in a diversified fund. Use an app like Stash or Acorn, and you would be able to withdraw your money plus earnings by selling the stocks at the end of the year, or even just a portion of them. Beware that whatever gains you make this way do count toward your income for the year, though, and will be subject to taxes. The potential is there, though to make a decent percentage of gain, as the stock market historically makes between 6% and 10% over time.

Another idea is to keep a list of people you like to buy for in your purse or wallet. Throughout the year, as you see gifts that would suit the people on your list, you could buy them one at a time. This would spread the cost over the year, instead of having to put it all on the same credit card at the end of the year and play catch up for the following months.

Don’t forget that some people really value the thought of the gift over the cost of the gift, as well. What about making a gift for someone that touches on something personal for them? Dressing up a picture frame with glue and glitter, or special words, with a picture of you and that person together can touch a heart. Think outside the box. Spending time with your mom one-on-one would probably mean more to her than any trinket. There are probably hundreds of ideas similar to this one that wouldn’t break the bank, but would still carry meaning. Isn’t that the true idea behind gift giving, anyway? We want the person receiving the gift to know that we love them, value them, think of them, and want to see happiness on their face. That counts for you, too. The holidays should make you happy, not totally stress you out. Try one or more of these tips, and maybe one will work for you.

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Introduction to Debt

Debt: A Four Letter Word

If you are like me, you probably cringe when you hear the word debt. It feels heavy. It is a burden. Many of us are buried under it. With skyrocketing costs and compounding interest, it can feel like it always grows and we can never get out of it.

I once had almost $90,000 in student loans, and when added together with my spouse’s loans it was closer to $140,000. The payments were astronomical. Then we bought a car, and a house. The amount of debt was in upwards of 3.5xs our annual income combined. The payments took more than 2/3 of our monthly earnings.

We felt like we would never get anywhere. It seemed hopeless. Our payments barely covered the interest most months.

It is Possible to Get Out of Debt

This is what set me on my mission to find a way out. Pursuing the American Dream had us drowning. I needed to find a life raft. It took me countless hours of research, and a lot of trial and error, to find a way that worked for us. I did find it, though. I set us on a path toward financial breathing space using determination, perseverance, a bit of sacrifice, and different methods I had learned. The result is that we no longer have student loan debt, and our car and home could be paid off within the next 2 years, if all goes as planned.

That lead me here. To this desire to help others who have found themselves in a similar scenario. I want to share with you what I have learned, so you don’t have to suffer as much. I want you to know it is possible, and you can do it, if you want to. That is what this website is all about. I hope it helps you. I envision it building a community of people with different ideas that we can all share to help one another.

You don’t have to pay off all your debt to get into a place where it won’t overwhelm you. It is up to you. Use this website as a place to learn and pick and choose what works for you.

To Financial Space and Joy in Life,

Gina

 

What’s The Best Way to Pay Off Student Loans?

 

Big dreams, big debt

Many people who go to college do so with the help of student loans. I was one of those kids who couldn’t quite decide what I wanted to be when I grew up, and so I ended up spending many extra years in college, accruing massive student loan debt the whole time. At the time, I didn’t pay much attention to it, because it is not required to make payments on student loans while one is still in school. I sure did notice afterward, though, when the bills started coming in! I had multiple different loans from different companies, including both public and private loans. I had maxed out the amount of public or federal loans that I was able to get and had to get the rest in private loans, which came with even more hefty interest rates. The result was hundreds of dollars per month in bills 6 months after graduation.

Indecision will cost you

I have two bachelor’s degrees because the first one ended up being in a major that really didn’t have much in the way of job prospects without my having to go on to my Doctorate, which I could not do at the time. Unfortunately, I found this out after graduation. I started out paying the loans the best I could, which sometimes meant that I paid one but not another, or none at all. I got farther and farther behind, and because of interest my balances kept going up. My credit took a serious hit.

Taking a Break from Student Loan Payments Without Penalty

I finally went back to college for a degree that would lead to a well paying career, and in doing so was able to skip my loan payments for a while longer. This is called having your student loans deferred. I learned that if you contact the servicer of your loans, there are multiple different types of deferments. You can apply to have loans deferred for hardship for varying lengths of time. The main thing is to communicate with the lender/servicer before you are late or miss a payment. This will save your credit.

How To Refinance Student Debt

After I graduated the second time, I started paying my loans again. I also started doing a lot of research about how to lower my payments, because I felt like I was getting absolutely nowhere and drowning. I found out that I could consolidate my federal loans into one large loan with a fixed interest rate with only 1 payment. I immediately did so. It wasn’t hard, it just took some paperwork. I did some searching online for companies that offered student loan refinancing. At the time, there was really only one program with the federal government that did so. Nowadays there are multiple companies that offer student loan consolidation, so if you decide to go this route, shop around for the best interest rate and time frames. I then only had that payment and my payments for my private loans, because the government did not allow the combination of public and private loans. This still beatthe 6 payments I had before that because the consolidated payment was significantly less than the individual payments had been, and the interest rate was pretty low. One note about consolidation, and that is that if you consolidate loans it may make you ineligible for certain repayment programs offered by the government. One of those is the loan repayment for public service program, which is a way for people to get loans forgiven if they enter into certain professions. Always look into the details of loan repayment programs you may be interested in before consolidating, unless you cannot make the payments without doing so.

The Best Way To Pay Off Student Loans: The Stacked Loan Payment Payoff Method

Since I still had several loan payments, I wanted to pay them off in the most efficient way possible. I did so using a method called stacked pay off. This means that any time I had extra money I would send it to the loan with the highest interest rate first until that loan got paid off. Then, I would apply the amount of money I had been paying on that loan to the next loan in line each month. This drops the balance of the loans much faster than just paying the minimum payment on each one or just paying a little extra on each one. It is also quite satisfying to see loans being paid in full.

During college, I was fortunate enough to get married. My spouse, unfortunately, had almost as much loan debt as I did. We applied the same methods to paying them off, including consolidating them. We decided to maintain our frugal college lifestyle even after we were both working, and we applied all of my spouses income and any extra I made directly to our student loans in the stacked loan payoff method. The result was that we were able to pay off $136,000 in student loans in 7 years, with a combined income of about $80,000 per year.

Takeaways

Before even taking out any student loans, do your best to make a firm decision on what you want to accomplish in college. Taking extra classes or changing majors costs a lot of extra money.

Always communicate with your lenders before you miss any payments or get into financial trouble. Often they can help with deferments or other money saving options.

If at all possible, pay extra each month to decrease the amount of interest you pay on the loans.

Consider consolidation, if you have multiple loans with multiple payments and the payments cause a strain on you.

If you still have multiple loans or debts, using the stacked loan payment method can save time and money by paying the loans with the highest interest first and then applying the payments for each paid off loan to the next loan in line.

It will take time, but you can and you will one day be debt free. In the meantime, there are ways to make obligation feel less overwhelming and more manageable.

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Good Debt, Bad Debt

Good Debt vs Bad Debt

You may be surprised to find that not all debt is the same. Whether debt is a good or bad thing can depend on the circumstances surrounding it. The type of debt also affects your credit score in different ways.

Basically, good debt is something that gives you access to an asset that should become more valuable over time. A mortgage is the prime example. Although it is usually a person’s largest chunk of debt, it falls into the good debt category because it gives that person control over a very large asset-their home. A home’s value usually rises over time, and could eventually make that person more money than their original mortgage loan. This is also one of the reasons that people like to invest in real estate. The difference between what a person pays for a house and what they rent it out for each month or what they eventually sell it for can be significant over time. Many people have made their fortunes in real estate by taking advantage of this. Of course, it isn’t a sure bet. Nothing really ever is when it comes to investing. Anyone who paid attention during the 2008-2009 mortgage crash knows this. If you buy a house that is over priced or values in the area drop significantly and it becomes worth less than you owe, you can become “upside down” in your mortgage. That debt would then become negative, at least until the market changed again. Luckily, it usually does if you wait long enough.

Examples of bad debt are debts that show a pattern of spending more than you make, or buying things that do not grow in value. Car payment debt is bad debt. A new car loses significant value immediately after being bought, and used cars continue to lose value over time in most cases. While it may be a necessary debt given the cost of cars these days, it is not considered a positive debt. Paying it off as quickly as possible should be a priority.

Credit card debt that is not paid off every month is also bad debt. If you don’t pay credit cards off every month, they accrue interest. That interest accrues more interest the next month and so on, until people can get quite overwhelmed with credit card debt. Many people fall victim to the ease of credit card use and do not pay attention to the balance as it rises each month. It is very easy to lose track of spending and find yourself in a situation where it is extremely difficult to pay off your balance. Always pay close attention to your credit card balance, and do your best to pay it off every month.

Mixed Good and Bad Type Debt

If credit cards are paid off every month, they can be considered positive debt, as this shows a pattern of strong financial management. This helps build your credit if you have a high limit and very low or no balance at the end of each month. This is called rolling credit. A couple accounts of rolling credit in good standing are major players in building a person’s credit score.

Student loans are an example of a mixed type of debt. While you are paying on them, if you do so every month and pay as agreed, they help to build your credit. However, their often substantial size counts against you, as it affects your debt to income ratio, which is important for your credit score.

If you default on your student loans, it will have a massive impact on your credit score. Take great pains to make sure this never happens. Always contact your loan holder if you anticipate having difficulty paying your payments on time. They may have options to help decrease or defer payments. Once your student loans are paid off, however, they help your credit because they show that you have met a significant financial obligation over a long period, assuming you did not have any late payments or defaults. Consolidating student loans can often help people lower their payments and simplify how they pay their loans, thus enabling them to benefit eventually from paying the loans off. If your payments are high each month due to several loans or you are having trouble keeping track of them all, consolidation may be a good option for you. It may even have a lower interest rate, which can save you a significant amount of money over time.

Debt To Income Ratio

Someone who owes a ton of money each month or overall, but does not make a lot of money has a high debt to income ratio. Banks and credit bureaus do not like this at all. It looks like you can barely make your payments on paper. Banks and other credit companies will be less likely to offer you loans, and more likely to give you steeper interest rates if they do offer you credit. You want to do whatever you can to not take out loans that you do not need, including credit card debt (which is a rolling loan). Paying on time and keeping loan balances low helps your credit.

Take Aways

Some types of debt are worse than others when it comes to their effect on your credit score. A mortgage, while a large debt, will not be looked at as negatively as a credit card balance. Student loans with high monthly payments hurt your debt to income ratio, but paying them off helps your credit score in the end. Car payments are always bad debt and should be paid off as quickly as one can manage.

Always pay your debts on time, every time. If you are having a hardship, contact the company, as they almost all have programs to help under these circumstances. Contacting them before you miss a payment can save your credit. Not doing so can hurt you for years to come.

How to Pay Your Mortgage Off Early

 

Mortgages are Massive Debt

For most people, their mortgage is the largest debt they will ever have. It takes up the majority of their income each month, and a lot of that money is spent directly on interest. Mortgages are large loans, which accrue compound interest each day. They are set up so that for many years, most of the payment you make goes to that interest first, before it ever touches the principal. The principal is the original amount you paid for the house. Most also include payments for property taxes and home insurance, and sometimes mortgage insurance as well. This is why you can make payments that amount to thousands of dollars a month, but your principal balance may go down only slightly. Seems like treading water, doesn’t it?

Mortgages are Good Debt

The good news is that mortgage debt is considered “good debt,” meaning it builds credit, rather than hurting it. The value of your house most likely will go up over time, so the amount you owe will become proportionally less than the house is worth. This is where the idea of having equity comes in. Equity is that difference between value and debt. If you wanted to, you could refinance based on the new higher value of your house and use the extra money for things such as home improvement or paying off “bad” debts, such as credit cards and cars. Many people do this in order to save on interest if the new interest rate is lower, and only have one monthly payment. Mind you, they are only saving on short term interest, as the interest they will pay over a 30-year mortgage after refinancing could end up being substantially more than they would have paid if they paid off their credit cards on their own. As a house builds equity, there are other options, such as taking out a home equity loan, otherwise known as a 2nd mortgage, to pay for those things mentioned above. This gives you a second payment every month. If you don’t want a specific amount of money, a home equity line of credit that works similarly to a credit card with a rolling balance could also be used. So, mortgages have some advantages, due to the fact that they are secured by real property that builds value. This is why it is important to make sure when you buy a house that you are getting a good deal. If you pay too much, and the house actually becomes worth less (as has happened before with housing market crashes), you will not have access to these loans and lines of credit, and the mortgage will become negative debt (referred to as upside down). This is unusual, but can happen if you buy at the peak of the market, when prices are highest.

Conventional Advice

Given those advantages, most finance advisors and coaches will tell you not to prioritize paying off your mortgage over paying other debts. The idea is that if your house is valued higher than your mortgage, you could theoretically sell it at any time and not have that debt. This is true.

How to Payoff Your Mortgage Early: If you are like me and can’t stand compound interest (unless it is building it for myself)

This article is for those that have decided that they want to pay off their mortgage early anyway. I am one of those people. For me, the idea of owing so much money causes me a great deal of stress. I don’t like the idea that as long as I owe that money, I don’t really own the house. Plus, it represents a lot of my monthly income. I also despise the idea of compound interest when it is compounding my debt and not building my portfolio, like it does in the stock market. I feel that it just is not fair to charge people interest over and over on the same money, and then make them pay the interest before the loan balance. It really makes the cost of the house astronomical, even when you think you are getting a good deal. My own house cost around $200,000, but if I pay that over 30 years, I will pay another $200,000 in interest. In my mind, that is like paying 100% interest! Even though the bank calls it 3.75%, the way it is compounded and paid sure adds up. A straight 3.75% on $200,000 would only be $7500. Now, that would be fair! However, it isn’t the way the banking system does it. Fair or not, if I pay my mortgage over 30 years, I will effectively pay double for my house.

I don’t want to pay $400,000 for a house worth $200,000. Even now that the value of the house has risen, I don’t want to pay that much extra in interest. The value doesn’t matter that much to me because I am not planning on selling the house. It is just a number on paper. This is why I have made it a priority to pay my mortgage off early.

Specific Ways to Accomplish Your Goal

There are a few different ways to do that. The first and simplest way to shave years off your mortgage is to split your mortgage payment so that you pay half of it every 2 weeks instead of paying it all once per month. Because of the way interest compounds and the number of weeks in a year, you will actually end up making an extra payment per year and saving yourself a lot of interest. When I switched, my mortgage was reduced by a whopping 6 years! All it took was a call to my mortgage company to change how I made the payments. Now they come out every time I get paid, which is pretty convenient.

Another way to pay your mortgage off early is to send any extra money you have directly to the mortgage principal. You have to be sure that you specify that the extra money goes to principal, or the mortgage company could just send it toward your next payment or interest, or escrow and it wouldn’t help your balance decrease. By sending money directly to your principal, the amount of your loan that is earning interest is reduced, and so is the amount of interest you will pay. You will find as you do this that more and more of your regular payments will start going toward principal as well. It is a good idea to talk to your mortgage company first, to find out if there are any limits on how many extra payments you can send, or instructions on how to make sure the money goes to principal before sending any extra payments.

I tend to send my extra payments at the end of the month, when all my money budgeted for the month is accounted for. I can plainly see what I have left over and send it straightaway. In the past, I have also sent extra payments on payday, if I got more in my check than I had budgeted for in the first place. I also sent any bonuses or pay raise money. These days, because of the COVID pandemic, I am only sending the extra money I make each check, and not leftover money at the end of the month. I am putting that money into savings, until things seem a little more stable. Eventually, the pandemic will be over and I can send a large lump sum to the mortgage, which will still reduce my interest and the amount of years I have to pay. In the meantime, I have the money if I need it. It is also in a savings account that is earning a little interest, as a bonus.

There are other strategies out there to payoff your mortgage early using home equity lines of credit and other such things, but I am not an expert on those, and so I will not address that. What I do know is that if you send any extra money you have to your mortgage principal as often as you can, your balance will go down, you will pay less interest, and you will pay your mortgage off sooner. If you are like me, knowing that someday I won’t have a massive mortgage payment gives me a lot of peace of mind. I will always have to pay taxes and insurance, but it will still be a substantially lower payment each month than I pay now, and it won’t be just giving the bank free money in the way of outrageous amounts of interest.

As a side note, this strategy is almost the same as the one I used to pay off my astronomical student loan debt. See my blog post on Paying off Student Loans for more information.

Take Aways

Mortgage debt, though considered “good debt” is a very large one. It is possible to pay less interest and pay your mortgage off early by sending any extra money you have directly to principal each month. Even splitting your payments so you pay every 2 weeks instead of once a month will save you a lot of money in interest. Every little bit counts, so send what you can when you can if paying off your mortgage early is your goal.

For helpful products and services, visit my Resources page.