Money Talks: Mortgages and Monster Trucks

I learned a hard lesson in my younger-youth (I'm still young-ish!) that was reinforced by our recent house sale: magically making money isn't going to happen for me.  In my early teens I invested $5000 with Investor's Group (and my parents' help).  Since my birth, my grandmother had put aside $25 a month for me, and the plan was to double my money by the time I ventured off to law school.  Instead, I was hit by the Enron bankruptcy (and just a slew of other bad luck, despite a pretty diversified portfolio).  For nearly a decade I lost money.  In my mid-twenties I finally gave up, sold my stocks, and walked away with only $3000.  It was crushing, especially because my grandmother had worked so hard to gift me that money and I felt like I had squandered it.  (I should have invested in Pyrex, the prices have exploded...)    

When Handy Hubby and I bought the townhouse I hoped that when we eventually sold it, we would see the windfall of profits for which I'd been patiently waiting.

Nope.

When we sold the townhouse, we broke even.  We got back every cent we put into it, even the real estate agents' fees, but we didn't make any money.  We did, however, walk away from the sale with a mittful of cash - enough to pay for the down payment on the lakehouse, enough to replenish our depleted savings accounts (carrying two mortgages proved more draining than we imagined), and also enough to gleefully skip over to a car dealership and buy a brand new Ram 2500 Truck.

Hello Lovely.

"Pay For a Brand New Car with Cash," had been on my bucket list since before I could drive (I was a weird kid).  It was truly exciting to pay for our truck with cash, although it was a lot less exciting than I had dreamed.  I always envisioned a burlap sack with a $ painted on the side, and me dramatically - no, triumphantly - counting out bills.  In reality we paid using a cashier's cheque, but it still felt like a major win to own our truck outright as soon as we drove it off the lot.  

As we pulled away from the dealership, we grinned at each other.  Neither the stock market nor the housing market had been kind to us.  But we had built up equity in our house and made magic happen.  WE did that, and it felt good.

Our biggest "secret"?  We over-paid our mortgage.

We started off small.  We were very nervous about jumping from renting to owning and opted for a longer amortization to decrease our monthly payments.  As soon as we were settled into a routine and knew our limits, we added a small amount to each of our payments.  We kept increasing our payments, any chance we got.  When we finally finished paying off student debt, we started putting a good chunk of that amount toward the mortgage every month.  When we finished paying off our car loan, we added even more money.  By last year, we had doubled our monthly payment.  All of that extra money went straight to the principal, which saved us a lot of interest.  When we bought the townhouse we had a schedule of 35 years to pay it off (yikes!), but after only four years of over-paying, we'd whittled the number of years left to 7!

Now we're turning our attention to our new mortgage, eager to reduce that beast too.  Some banks do whatever it takes to keep you paying a mortgage, longer, by offering things like low monthly payments (with lengthy amortization periods), low down payment options, "payment holidays".  Our own mortgage lender discouraged us from paying extra on our mortgage.  A good financial expert can help determine the right course of action because paying off a debt isn't the only secret to financial health, and in some cases it might be wiser to invest or save extra money.  I hesitate writing these Money Talks posts because I'm no financial expert (obviously), but I think there's value in laypeople chatting about what has worked (or not worked) for them.  Plus, now that I'm 30, aren't I inching toward the age when it's appropriate - nay, expected - to dole out advice to young whipper snappers?

Here are a few more thoughts on saving money on a mortgage - as well as some reasons why there is no one-size-fits-all advice.

There's value in a large down payment.  In Canada Mortgage Default Insurance (CMHC Insurance) applies to a mortgage with a down payment between 5%-19.99%.  It's good and bad: it means people can buy a house with a smaller down payment than used to be required and mortgage rates overall are (supposedly) lower, but it also means that folks with a down payment of less than 20% incur a fee (around 2-3% of the purchase price).  It's difficult to determine the "right" course of action when it comes to down payments.  Sometimes even if a person/couple has the 20% required, they might want to use it for renovations/emergency savings so it could be smarter to just accept the fee and not need to rely on credit cards or a personal line of credit for updates or emergencies that arise.  Also, it might be worth it to incur the fee rather than continue to rent.  Each person's situation is different, but to save money on a mortgage, the larger the down payment the smaller the amount of interest charged - plus the CMHC fee can be avoided. 

A weekly or bi-weekly payment can help.  We've always liked a weekly or bi-weekly payment plan to help nudge thing along.  I'm not promoting RBC bank, but I found a great chart on their website that illustrates the savings with different payment options (ranging from monthly to accelerated weekly).  A mortgage lender can help figure out the exact savings for you.

 

Mo money, less interest.  A mortgage is one of those problems you can throw money at.  For us, adding more money to our mortgage payment helped reduce a mortgage because all that "extra" money went to the principle.  Any amount helps and can really add up.  Again, I don't want to promote a particular lender but this calculator demonstrates the savings generated by even a small additional payment to a mortgage.  Lump sum payments are a good approach too (see you, income tax return!).  Unfortunately, lenders typically cap the amount of extra money that can be put toward a mortgage annually.  

Of course the egghead suggests reading.   In my humble opinion, I think that individuals need to be informed, in general.  No institution is perfect and we can't rely on professionals exclusively.  For example, there are excellent interior designers out there but even folks who hire one flip through a decor magazine to get an idea of what they'd like.  Cancer patients often read up on the latest courses of treatment so they're informed when meet with their doctors.  I think we need to approach finances the same way.  Having said that, a lot of jibber-jabber about finances is really difficult to comprehend.  I may or may not have a low-risk investment in "The Utilities," a decision based solely on how profitable it is to own the utilities in Monopoly.  I do my best to muddle through.  Gail Vaz Oxlade is really good at making it all seem so simple.

One day I might work up the courage to try higher-risk investing or, better yet, maybe I'll get my windfall after all (that's why we buy lotto tickets!), but ultimately Hubby and I know that we need to work hard for future financial security - there's no easy answer.  All I know for certain is that if we continue to chip away at our mortgage, the next time we sell our house I'm buying my dream car...vroom vroom.

Money Talks: How We Got Rid of Student Debt Faster

In this second installment of Money Talks, (click here for the first post) I'm going to spill the beans on how we paid our student debt faster.

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First, I have a confession: I never accumulated student debt.  Early on, my parents told me they had no funds for university and I'd have to win scholarships or go broke.  I chose the former and I feel VERY privileged to have parents who helped facilitate that goal.   To help me study successfully, I had my own study space (a little nook at the top of the stairs), and, as an added bonus, nobody smacked sixteen year old me when she stomped into the living room of our small home, demanding the TV be turned down because "I'm studying, you asshats".  Through a combination of hard work, good luck and a strong support system, I won scholarships for my undergrad degree.  I was also fortunate enough to have been able to live at home for my undergrad, which saved me oodles of money, but I did work a lot of jobs so as not be a mooch.  One semester I worked full-time, went to school full-time and sat on the Board of Directors for a not-for-profit organization.  I gained a lot of weight from stress-eating that year :(  I won scholarships for my MA and am on a scholarship right now for my PhD (which runs out soon).  I have worked part time through grad school, but Hubby is the super star.  He is a super smart cookie and landed a job he loves right out of school, earning much more than me and landing the oh-so-fun responsibility of primary breadwinner.  I am completely aware that my income is meager, he's supporting me right now, and I'd likely have a big fat loan if it weren't for him.    

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I say all this NOT because I want to make it sound like our student debt was Hubby's responsibility or fault.  I just want to point out that Hubs and I are lucky that we weren't a couple with two sets of debt.  Still, the loan wasn't small - we could have bought one of these.  Everyone's situation is different but, at the end of the day, debt stinks for all of us.  Here are some things that helped us say "buh-bye" to a scary amount of student debt in 3 years (and shaved off 7 years from the original repayment plan). 

1. We worked as a team (this applies to single folks too!).

I'm not going to lie, I was a bit shocked to all of a sudden be facing student debt because I had dodged that bullet for so long.  At first, I felt glum and I stubbornly refused to acknowledge responsibility.  I quickly realized that sharing a life together didn't just mean sharing incomes (yay!), it also meant sharing debt.  We pooled our incomes, throwing whatever we could at the debt, and scrimped and saved together, which made us a stronger debt-fighting team.  Because we were in it together, it also felt less stressful.  I know not all couples pool incomes like we do, but I think working together can happen in other ways as well.  For example, if Sam has debt but Jamie doesn't, Jamie can take on more chores around the house so Sam can work extra shifts to put money toward the debt.  If Sally is single, she can still work as a team by telling her friends and family about her debt and asking that they not lure her out for expensive social gatherings, but help her save cash by doing more free or inexpensive things, like spending time outdoors or having potluck parties.  There's lots of things friends and family can do to help one another get out of debt (and not just student debt): forgoing gift giving until debts are cleared, car-pooling, hosting clothing swaps, etc.

2. We faced the debt.  Showed the debt who is boss.  And tricked ourselves a little.

After deciding to work as a team, the most important step was saying, "Hey, student debt.  Bite me".  I know a lot of people who bury their heads in the sand and avoid thinking about it.  I know, it's a shock!  I wanted to bury my head too.  Opening those statements felt like being punched.  So many zeroes . . .  But facing it and hatching a plan that suited us were necessary to get rid of it faster.  Part of our plan included building an overpayment into our budget right away, so we automatically thought of our monthly payments as bigger than they were required to be.  We quickly forgot what we had to pay and automatically paid the larger sum we had figured out what manageable.  Essentially, we kind of tricked ourselves into paying more each month. 

3. We got to know our debt, inside and out.

Hubby & I read the fine print and tried to understand everything about the loan, including options for if he didn't find a job within the grace period, if we couldn't make the minimum payment, etc.  Government student loans usually have lots of fine print, including points that can help people, especially if they're having trouble making payments, so it's a good idea to be familiar with the terms. 

4. We ignored the "grace" period.

Hubs was fortunate enough to get a job right away, so we didn't need the grace period his student loan offered (they vary).  Although some folks need the grace period to find work, some just use it to enjoy their new wage.  I get it.  Paying debt back is about as fun as a root canal, but delaying the inevitable only makes it worse.  We started paying Day One (because that's when interest started being calculated on the Federal part) and we saved some major bucks.

5. We threw extra money at it.

Any time we had extra money (after we'd saved some, of course), we tossed it on the loan.  Rules stipulating payments also vary, but most loans let you pay some extra.  Although we didn't make a lot at the time, we did it whenever we could and saved some more money on interest because those extra payments went right to the principle.  Every little bit (even $20 here and there) helped.

6. We found creative ways to save and make more money.

Step #5 was much easier when we started making more money.  I started tutoring and selling my handmade spiders, while Hubby took on overtime work when he could.  We were already into yard sales, so we saved major bucks furnishing our apartment, but I also started a precursor to the Etsy shop, selling a few sweet vintage scores through kijiji.  Consignment shops were great for recouping money from clothes that no longer fit.  I mean it when I say every little bit helped.

7. We put our tax return toward it.

I'm not sure how rules vary from country to country, but the tax we paid on student loans was tax deductible and boosted our income tax return.  Yay!  A silver lining!!  We took all that money and put it onto our loan (saving some to add to our emergency/house buying/please don't lose your job, Hubby funds).  

8. We calculated everything we bought with student loan interest added on.

In the first few years of living together, things were tight and we were on a strict, strict budget.  Any non-essential item we bought, we treated as if we were paying for it with a loan because, basically, any frivolous item kept us from paying down the debt, which in turn incurred more interest.  I think this really helped keep our spending in check at the time.  Did we really want to go out to see a movie when that $15.00 had a prime+2 interest tacked on?  No thanks, a stay at home movie night was good enough!  This is also where teamwork was important: neither of us tempted the other with unnecessary purchases or evenings out.  We started dating as teens, so we were old pros at free date nights!  We entertained ourselves cheaply and helped each other avoid temptations (mmmm, snacks, oooo, purses).  I think the fancy term for what we did is The Spending Fast.  We're trying to get back to being more frugal.

9. We didn't buy a house until we saw the light at the end of the tunnel.

This was somewhat a coincidence, but we didn't buy a house until we were only four months away from repaying the debt.  The timing was pretty lucky and I'm so happy it worked out that way because we learned that it was much easier to fast-track a debt repayment with fixed expenses in an apartment.   In fact, once we bought the townhouse and had to deal with unplanned expenses like a $400 plumbing emergency, rising utility costs, etc., our debt repayment slowed and 4 months turned into 6 or 7.  I'm so happy we didn't buy a home earlier because it definitely would have slowed our repayment plan.  

Some other ideas:

10. If applicable, pay loans with higher interest rates first.
11. Don't overextend on debt repayment because paying extra to student loans makes no sense if it pushes you into overdraft, forces you to rely on credit cards or hinders the payment of a mortgage or larger loans.
12. As with mortgages, biweekly payments can save money on interest, even if you put the same amount as you would with a monthly payment (read more about biweekly payments here).
13. Considering transferring a higher interest debt to something with a lower interest rate.  For example, if student debt is actually credit card debt accumulated while getting a degree, paying off the cards with a personal line of credit (which has a much lower interest rate) and then paying that off ASAP might be a good choice - but speak to a financial pro.
14. Remember to keep saving.  It's tempting to put every cent on debt but it's important to have a cushion.
15. If you're really stuck, speak with a professional about options for debt relief, deferring payments or debt consolidation.

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Have you tackled a student loan?  What tips have helped you get the student loan monkey off your back?

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