Why People Hate Their Mortgage and Why You Shouldn’t

Many people hate their mortgage because they know over the life of a 30 year loan they will spend more in interest than the house cost them in the first place. To save money it becomes very tempting to make a bigger down payment, or make extra principal payments. Unfortunately, saving money is not the same as making money. Or, put another way, paying off debt is not the same as accumulating assets. By tackling the mortgage payoff first, and the savings goal second, many fail to consider the important role a mortgage plays in our savings effort. Every dollar we give the bank is a dollar we did not invest. While paying off the mortgage saves us interest, it denies us the opportunity to earn interest with that money. Consider this investment: Every dollar you invest is inaccessible. Every dollar you invest has the potential to increase your federal and state tax bills. Every dollar you invest is guaranteed to earn a very low rate of return for the next 30 years. Every dollar you invest makes the investment less safe. Not too many of us would jump at the chance to make this investment, yet millions do every year by pre-paying their tax-deductible 30 year mortgage loan. Remember, the only way to get your equity out is to borrow it back on the bank’s terms, at some unknown rate in the future or, worse yet, sell the house. By pre-paying your tax deductible mortgage you increase your tax bill each year as you have less interest to deduct. The after-tax rate on a 30 year fixed mortgage is often much lower than many conservative investments. The more equity you build up in your home the more risk you take. If you had a disability or job loss, and had to stop making payments on a 100k loan on a 400k home, the bank could still foreclose and you would be out 300k. If you stopped making payments on a 350k loan you would be out only 50k. The same holds true if the home is underinsured or their is a natural disaster, like a flood, that the house is not insured for at all. Most of us think that the more equity we have in our house the safer we are. The truth is that the more savings we have, not equity, the safer we are. Before paying down your tax-deductible mortgage, make sure you have the following financial milestones accomplished:

  1. Cash Cushion – Build and maintain a cash cushion with 3 to 6 months of liquid living expenses.
  2. Protection – Establish appropriate levels of disability and life insurance.
  3. ‘Non Preferred’ Debt Free – Pay off all non-tax-deductible debt (credit cards, installment loans, etc).
  4. Retirement and College – Plans fully funded.

It is important to realize our financial goals in the correct order. Paying off your mortgage is a great goal. However, it should not be your first, or only, financial goal.

Mortgages and Divorce

We have all heard the statistics: nearly 50% of all U.S. marriages end in divorce.

During this time of upheaval, one thing that shouldn’t have to change is the credit status you’ve worked so hard to achieve. Unfortunately, for many, the experience is the exact opposite. Unfulfilled promises to pay bills and a breakdown in communication can lead to unwanted credit issues. These issues may affect your ability to refinance your current loan or purchase a new home.

The good news is it doesn’t have to be this way. By taking a proactive approach and creating a specific plan to maintain and protect your credit during divorce, you can ensure that “starting over” doesn’t have to also mean rebuilding credit. The first step is to obtain a valid copy of your credit report.

Once you’ve gathered the facts, it’s time to make a plan:

  1. Can you purchase a new home now or will you have to wait until everything is finalized?
  2. Can you refinance the house to pay off your spouse and consolidate debt?
  3. Can you use child support or alimony to qualify for a new mortgage? How long do you have to wait?

These are some of the questions that we can assist you with. Divorce is difficult for everyone involved. By having professional advice, both legal and financial, you can ensure that your credit remains intact

Getting Your Financial House in Order

Life is often so hectic that it is difficult to find the time to make sure all areas of your financial future are secure. Yet such a comprehensive assessment is critical to the ongoing health, security and stability of your financial future.

Take a moment to ask yourself these important questions and check off those you have completed.

  1. Property Insurance Review

    Do you have adequate property and casualty insurance? Do you need an Umbrella Policy? Do you have the correct deductibles to minimize your premiums while still providing adequate protection?

  2. Family Budget

    Do you have a family budget? Mint.com is a great resource to get your finances organized and see where your dollars are going each month.

  3. Emergency Savings Plan Funded

    Do you have 3-6 months’ worth of living expenses saved? Would you be able to survive financially if there was a job loss or unexpected short term disability?

  4. Life Insurance Review

    Do you have at least 10 times your salary in life insurance? Is your life insurance portable (not tied to your current job)? Have you updated your insurance since you got married, had kids or bought a house?

  5. Disability Insurance Review

    Do you have short and long term disability insurance? What would happen to your finances and family if you were out of work for 6 months, 2 years?

  6. Will & Estate Plan

    Do you have a Will and/or Estate Plan? Have you reviewed your will or estate plan within the last 5 years?

  7. Retirement Plan

    Do you have adequate retirement savings? Are you saving in such a way that you are reducing future taxes? Will you have an income stream in retirement that is not contingent upon the ups and downs of the stock market?

  8. College Plan

    Do you have a detailed savings plan for college? Do you understand how to save so that your expected family contribution is as low as possible?

The Chaffee Team is here to help you check these items off your “to-do” list.  We have a vast list of referral partners who we work closely with to get you answers to these important questions.

Contact us today if you would like a referral for any of these financial milestones.