Success Warrior: Alan B. Rowley II - Beachbody.com, P90X, Voluntaryism, Voluntarism

My House Payment

I've been paying on my mortgage for a year now and here are some things that I have learned:

I paid $16.96 less in interest this month than I did a year ago.

If you don't count insurance and taxes (because you have to pay them even if you don't have a mortgage) 83% of the remainder of my house payment this month went to interest.

The first month it was 85%.  The small sliver of a silver lining is that I am paying 2% more toward the principle now.

Next month, the interest I'm paying will be less than $700.00 a month.  Woo hoo!

It's amazing that people accept paying that much a month as a natural part of life.  I don't and as soon as I can, I'm going to knock it off.  If you asked them to throw away $700 for something else, they would think you were crazy.  If you asked them if having $700 a month in cash would make a difference in their life, the answer is "of course."

I plan on stopping the waste of money that outgoing interest is by getting out of debt.  My mortgage is my biggest drain of money so the sooner we can start plugging that drain, the better.

I'll Gladly Pay You Tuesday For A Hamburger Today

I have more to tell you about the numbers from June, something obvious but important that I now have great visual data to support.  I also need to tell you about our new plan because we aren't going to be trying to pay the car off by August now.  However, we had a chance encounter yesterday that is begging me to write about it so that's what you're getting today.

We went into town yesterday to take Trey and his cousins to an airplane museum.  They absolutely loved it and you'll be able to read about it in Chronicles in the next couple of days after the pictures are uploaded.

We went to the museum first thing and then to lunch.  After lunch, Trey went with his Aunt Heather and all the cousins to go play in a pool and on a slip and slide.  Tia and I were going to go do a small bit of shopping and if time permitted, go see a movie.  It would be the third movie we had seen in a theatre in 3 years.  Everyone should go to a movie at least once a year, don't you think?

During the week, my wife and I had been looking at some floor plans and there was one that I wanted to see in real life.  On paper, it really had my interest but I wanted to know what it really looked like.

On our way to the stores, she called to see if they had a model of that home.  Guess who answered the phone?

Reverse Amortization? Just Shoot Yourself and Be Done With It

I have to admit that I was fairly naive when it come to money until I really started looking into it.  There are a lot of things that aren't general knowledge (because banks and credit cards would miss out on some money) and there are some things that I have just never come across.  Writing this blog has shown me some truly disastrous things out there and this one needs to be somewhere near the top of the list.

I thought that EBP loans were bad but I have come across something worse.  What's an EBP loan?  The reason you probably haven't heard of it is because I made it up.  You have probaby heard it called an "interest only" loan, which is such a misnomer that it should be illegal under false advertising laws.  You don't pay only interest as the name would have you think.  People with these loans are paying interest, insurance, taxes, and usually PMI.  The only thing they aren't paying is anything toward the principle of the loan.  They aren't reducing the balance at all.  They are renting their own house.  So I call them what they should be called, "Everything But Principle (EBP)" Loans.

These loans are usually a bad idea but they pale in comparison to reverse amortization.

Banks helping out home owners? Is it true?

Banks lent money out to people that couldn't afford to make the payments and now foreclosures are going through the roof.  To help fix the problem, several banks have created Mod Squads (*I* did not make up the term).  These Mod Squads go around to people who are looking at foreclosure and try to modify the mortgage in a way that people will be able to stay in the home.  They are doing this, as the article I read states, to help the home owner. 

Is it true that they are helping the home owner?  Technically, yes, they are.  It is a very misleading statement though because most people don't have a good understanding of the process involved in owning a home.

Most of the people living in these homes consider themselves to be home owners.  In fact, they've been told that they are.  When they fill out credit applications, they check the box that indicates they are home owners.  The truth of course is that they are loan-owners.  Mortgage companies own most of the homes in the US. 

You go around shopping for a house and find the one that is perfect for you (or that you think you can mark up and flip) and you tell your mortgage company.  They buy the house so that it's reserved for you.  You then make payments to them plus interest.  If you are able to come up with two to three times as much money as the mortgage company paid, they sell the house to you.  You are then a home owner. 

Let's look at the situation that the banks created.  Houses are being foreclosed upon.  Who loses money?  The loan owner loses whatever they have paid to the mortgage company, right?  Most of that was interest and lost anyway.  The amount of principle they paid in the first year or two barely amounts to a couple of grand.  They can walk away and rent an apartment for half the cost of the mortgage payment.

The mortgage company, the home owner, on the other hand is stuck with a house that will appraise somewhere between 10% and 30% below what they paid for it.  Some mortgage companies are trying, with little success, to sell their homes at the same price they paid for them.  While they are holding them, they have to pay taxes and upkeep on the homes.  Other mortgage companies are dumping the houses at a loss because no matter how you look at it, it's going to be a loss.

Looking at the chart of mortgage amortization

If you look at the chart of a typical mortgage, you see that when you get to the last half of the life of the loan, the amount of money going toward principle really picks up speed.  You spend the first half of the loan paying more in interest than what goes toward the principle.

Understanding this, it then figures that you should try to get to that halfway point as quickly as possible.  Even if you don't want to follow through and just pay off your house, you should put extra money into it until you tip the scale.  When more of your regular payment is going to principle than interest, you could go back to the regular payments and you will have saved more than a decade of time and tens of thousands of dollars.

That's what the chart suggests but that's not what usually happens.

Most people either move or refinance every 5 years.  They spend all their time in the very worst period of their loan.  In those same 5 years, they could completely change their life financially.  Instead, they dig themselves into deeper debt, raising the total amount they owe and the amount of their monthly payments.

People get caught in a trap of their own making.  They refinance to lower their monthly payments and then they charge things up to the point where they owe more each month than before.  Most people could get out of financial trouble without refinancing.  Refinancing might be a possible answer for some but once they refi, they need to not charge anymore and pay the mortgage down.

At least to the halfway point.

A tool for people with mortgages or are going to get one

I have looked around now and again for a mortgage calculator that I like and I finally found one.  So I'm going to share it with you.

http://www.apimagazine.com.au/calculators/mortgage/

This calculator will show you how much your monthly payments will be including your insurance and taxes.  It will show you how much interest you're going to pay if you just make your house payments.

Under that is the part that is eye opening.  You can put in an amount that you want to add to your house payment each month and it will tell you how much money you'll save and how much quicker your house will be paid off.  This calculator has a couple features that I haven't found on others.  You can add the extra money at any point in the calculation.  If you have been paying on your mortgage for 3 years, you can tell the program to start adding extra money at month 37 and note how it changes things.

It also has a pretty blue and green graph.  =)

Here's a couple quick examples but I really encourage you to go to the site and play around yourself. 

If you have a $200,000 mortgage at 6% and you pay an extra $100 a month from the start, you will save $50,000 and pay off the loan 5.5 years early.

If you can pay an extra $250 a month from the start, you'll save $91,000 and pay it off 10 years early.

Just about everyone can get to the point where they can pay these amounts.  In fact, most people with houses can probably get to where they can add an extra $1,000 a month to their house payment.  Play with the calculator and see if that doesn't encourage you to put some extra money where it counts.  Paying a little bit extra saves you thousands of dollars and years and years of your time.

Bad credit? No credit? No problem!

In fact, that's probably how some lenders prefer it.  After all, that means they get to charge you more since they are taking on more risk.  They probably relish the small nicks to your credit.  It's a fine line of course, as most things in life are.  How much on a credit report is just a mistake and how much shows irresponsibility with money?

We ended up paying an extra 1% in interest on our last house just because the bank could do that.  My ex completely and utterly destroyed my credit to what some would say was nearly beyond repair.  But my current wife and I set about repairing it and the lender was quite surprised to see just how much we had repaired it.  All our payments were on time, errors had been taken off my report, and a fraud watch put on because it appeared that for a while my ex continued to include my name and social for credit applications. 

Still, when it came time to tell us what our interest rate would be, it went something like this.  "Here's the current interest rate.  See this on your report, we are adding a quarter percent.  And this too.  This one here is going to cost you half a percent.  So your final interest rate is 1% higher."

Now, understand that they were going to give us the loan.  And understand that it meant they thought we were going to pay it back.  And understand that, in fact, they thought we could pay more than the asking price because a higher interest rate means a higher payment. 

They knew we were going to pay and the charged us for being a "higher risk" just because they could.

This loan officer was very nice, saying nice things and using KY while he bent us over, but we promised to never be in that position ever again if there was any way around it.

Tomorrow, I'll tie this back to Prosper.com.