I ran this article several months ago as a guest post on Living Almost Large. I got a little flack over there for the 30-year mortgage issue. Most of her readers are significantly younger than I am and a lot of them live on the West Coast. The primary objection appeared to be that it was impossible to find a house which would be affordable with a 30-year mortgage. That may well be true. We do what we can but I believe we should strive to have a shorter term mortgage. In middle America, where I live, there are still plenty of affordable homes, making a shorter term mortgage more of a possibility. I was curious to run the article over here and see what you think.
1. Having a 30-year mortgage
The amount of interest you pay over the course of a 30-year mortgage is staggering. A $250,000, 30-year mortgage at 8% would end up costing you $660,240! Tax write-off you say? On average, for every $100,000 in mortgage interest you pay, your tax bill will be reduced by $28,500 (28.5% being the federal tax bracket of the average citizen). Is it really worth it to spend $100,000 for a $28,500 tax write-off? If you are house shopping, look at 15-year mortgages, you will build equity quickly and waste less money on interest. If you already have a 30-year mortgage start paying an additional 10% every month, telling the bank to apply that 10% against your principal. You will end up paying off your mortgage years earlier with this simple strategy. Keep a close eye on your statements to ensure your payments are applied correctly.
2. Not taking credit-card debt seriously
Carrying credit card debt is stressful. If one person is constantly running up debt while the other person is struggling to keep the financial ship afloat, the anxiety can ruin the relationship. If both people are running up debt, the stress and anxiety will mount even faster. That anxiety will never go away until the debt is paid off. Ensure you are both aware of your entire financial situation. You should also both know if there are any black marks on the other’s credit report. You do not want to find this information out when you are sitting in your mortgage broker’s office being denied a loan.
3. Not starting a college-savings plan soon enough
Remember, your retirement fund comes first! You will do your children no favors if you ruin yourself to fund their college education. After you have put aside at least 10% of your income, fund a college-savings plan. Start a 529 plan when your children are born. If you think you cannot squeeze any more money out of your budget for a 529 plan, think about trying to squeeze out several thousand dollars every year to pay for college when the time comes. You can choose to make payments into a 529 plan and earn interest now or you can pay interest on college loans later. Which makes more sense?
4. Not teaching your kids about money
If you don’t teach your kids about money, how will they learn? We know they don’t teach financial responsibility in public school. Off they will go to college, financially unprepared, where they will be inundated by credit card offers and, before you know it, they will be drowning in debt. Do it early, do it often; teach your children about money!
5. Not figuring out who is responsible for what
When you decide to combine households you may think the best way to handle your finances is obvious. Unfortunately, if you’ve not talked about it beforehand, you may discover that your partner has a completely different idea on how it should work. Will you have your own accounts plus a joint account from which to pay the bills or will everything go into the same pot? Who will actually sit down and pay the bills? How will you deal with the financial obligations you each brought into the relationship? What about fun money? Will you set a dollar amount over which neither partner can go without talking it over? Have a discussion and come to an agreement regarding how money will be handled in your household and you will save yourself a lot of trouble!
Arguing about money is one of the primary reasons relationships fail. Be open and honest and work together to build a strong financial future.
Have you been married awhile? What financial advice would you give to newly (or about to be) marrieds?
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8 comments:
Our first house was a small one and our mortgage was a fifteen year mortgage. I added fifty dollars a month to it as well. Because of this, we were able to move up to our dream house two years later. We got a 30 year mort on that one but made extra payments at the fifteen year rate when possible. This strategy really works. We ended up being real estate investors!
Good stuff. Yeah, I'm in a 30-yr mortgage but I'm paying extra to the principal every month.
I do prefer the flexibility of the lower payment of the 30-yr loan so that if things get tough I can drop back and make the scheduled payment.
A fifteen-year mortgage is better if you can find a livable place at a price low enough that you can afford the higher mortgage payments. In the current market, that is actually doable: one of my research assistants found a big house with a pool on a corner lot in one of the toniest central neighborhoods for $225,000 -- less than I paid for my tract house in a buffer zone between that fancy district and a dangerous slum. The house, not a foreclosure but one sold out of an estate by heirs anxious to unload it, is surrounded by $500,000 properties.
Two moderate incomes could manage a 15-year mortgage, and it would be well worth the extra cost.
Love the Minimalist's idea. I have often thought we're a little brainwashed about that 30 year mtg. thing. The fact is, even though it's a tax deduction, it's still a lot of money actually out of your pocket. What couldn't you do with an extra $50,000 let's say, in your pocket?
I think sometimes what we think we have to have, and what makes good financial sense are very different, duh. If it's hard to find a home you can afford, maybe saving until you can buy something a little smaller with less mortgage is what you have to do. Then, make extra to build equity quicker.
Wow! A house for $225,000 and a tax deduction on your mortgage! Here in Australia you would struggle to find anything under $300,00, and that would need serious work, in any of our major cities. We do not get tax deductions on our mortgage but on the other hand our universities are largely federally funded. There are fees but not as large as in the US.
We paid our home off after about 15 years. Any extra money went on the mortgage. We paid half our monthly payment each fortnight this means you make a full extra payment each year. It was a bit of struggle early on but so worth it now - no debt and still in our early forties.
Lynda
Thanks everyone for your comments. The stragety of taking a 30-year and paying it more quickly when you can fouls a lot of people up because they never "can". Things come up. I salute anyone who is able to follow this plan.
My local small town bank holds my mortgage and their choice was 5 years or 20 so I took a 20-year mortgage. That's my next big debt to tackle at an accelerated rate!
I've been married for 11 years. We have two cars. One is 12 years old and the other is 5 years old. Both are paid for.
We have no credit card debt or other charge cards. We have two incomes and pay down any debt possible.
Basically we are living on my income and paying down debt with my wife's income. She hasn't always worked, but when she does we make the most of it.
We're starting to pay down the mortgage. If we can continue to pay down $2,000 a month, we'll reduce it significantly this year.
What a great round up of the main financial mistakes that couples make!
I am sure there are many more which could be added to the list - we are all guilty of slipping with finances onces in a while - especailly when blinded by L.O.V.E :)
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