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Getting Debt Free, Part Three

Posted By: Randy GageSeptember 8, 2011

Okay in the last two posts we’ve looked at budgeting, credit cards and buying cars.  Now let’s look at the largest expenditure (and loan) most people make – your home.

Most everyone just thinks it’s normal to finance a home.  But that’s not always a good idea.  But in reality, for most people the only way they would get one is to finance it.  And if you’re paying rent to someone else in the meantime, you’re not really saving anything.  For a decision of this magnitude, it’s best that you check with your accountant or financial planner for the best scenario for you, as there are tax and other considerations.

Here’s what I would add to the discussion…

Please don’t get sucked into the “buy with no money down” or high leverage loans.  I know they’re in vogue, but the recent real estate bubble bursting here in the U.S. and many other countries has shown what a horrible idea that is.

If you can’t put down a healthy chunk for the down payment, then it’s probably not a prudent purchase for your prosperity just yet.  And don't be overly concerned with whether the market value goes up or down.  For example, my condo in South Beach has lost about $300,000 in value, according to the real estate market.  But that’s irrelevant to me because I am not selling it.  The value will come back.  Buy a place that works for your budget so that you never have to sell it in distressed times and you won’t have anything to worry about.

Then work hard to pay it off as soon as you can, so you can be completely debt free.  (Other than what you may borrow for businesses and perhaps real estate investments.)

Do one of two things…

The first option is whenever you send in your payment, send an extra amount, even just $100, towards the principle.  It’s truly amazing how much money you save in interest when you do this.

The second option is even better…

That is to do a structured mortgage acceleration program.  They work something like this: Instead of sending in a mortgage payment every month, you pay half a payment, every two weeks. At the end of the year, that amounts to making one or two extra payments, directly on the principle.

If you finance a $100,000 house, you probably end up paying $350,000 to $400,000 for it.  If you do a mortgage acceleration program, you can slice anywhere from $60,000 to $80,000 off that!   Now do the math if your mortgage is $300,000, $500,000 or more…

Check if your lender has a mortgage acceleration program.  And if they don’t, find one who does.  Got any other tips?  Please share them below.

-RG

 

14 comments on “Getting Debt Free, Part Three”

  1. Randy- One other thing about having a home: plan on putting aside, depending on the age and size of your house, another $300-500 per month for updates, maintainance and repairs. This is almost always overlooked.

  2. One method I tell my tax clients if their lender won't do the 2 payments a month, and an easy way to cut the time in half: Pay the current month payment and also pay the next month's principal, instructing the lender to apply to the principal. The extra amount grows each month by a few dollars as you earn more income, so toward the end your extra payment will be as much as your current payment, but this will pay a 30 year mortgage in 15 years, 20 paid off in 10. Works great.

  3. Also for those who cannot find the large deposit or get credit then the lease option is great for getting a big house at low cost. Or for people who look at opportunity cost and don't want to tie up their cash in a non income producing asset.

    1. Negotiate a 20-40% discount (easy in current market)
    2. Pay £1000 down as a goodwill non refundable deposit.
    3. Take over the sellers expenses related to the house (usually to prevent them being repossessed) on a £250K house usually about £600-£700 pcm. (half of this monthly amount comes off the final price)
    4. Put in the contract that you can buy the house at the price agreed any time in the next 5 years.
    5. Live there for 4 years then put it up for sale and sell it before you purchase it at a nice profit.
    6. In the mean time invest the money that was available for deposit in other properties and get a 20% - infinity% return

    Inflation wipes away the debt in that 5 year period (probably halves it) and with the profit gained re invest it or then buy a house with a very large deposit.

    Need to look at the money tied up in the asset. Don't mind paying 6% for 20 years if the money I kept out of the house is making at least 20% and inflation is eating the debt.

    1. Make sure you make your payment directly to the bank. If the 'seller' keeps the cash the house could still go into foreclosure and you will not have a leg to stand on AND your deposit is gone.

  4. No money down mortgages are a bad idea when the price is stupidly over inflated and then borrowing 100-130% at 6% when a person has loads of bad debt and a tiny income.

    Good thing about the lease option is that if the deal goes bad you can just walk away from the deal and the current owner keeps the £1000 deposit and rent up to that period.

    It is a great way to build a portfolio and protect the downside
    This way we are only risking the initial money and the rent (even better if we rent it to someone else in the 5 year period)

  5. I agree with the primary premise of getting out from under your largest consumer debt as soon as you can. I do not agree with the strategy of paying into a lenders acceleration plan of weekly of biweekly payments. Yes, you will make the equivalent of a thirteenth payment per year. If you are early in the mortgage the majority of the payment will be interest and of no benefit to you only your lender. You would be better off to pay into a bank account on a weekly or biweekly basis and pay the mortgage on a monthly plan. Once a year take the excess funds accumulated in the bank account and pay it to the lender as a 100% principle payment. That way you get the maximum benefit and the mortgage will be paid even sooner.
    There are a few other ways to pay off mortgages even sooner for the right people.
    JMD

  6. I've been a fan of Dave Ramsey for several years. How are your beliefs - if any - different from his? Just curious. Thanks!

  7. Thanks Randy, a home is a huge commitment. Thank God, mine is fully paid up. At my advanced age, it is good to be debt free.

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  • 14 comments on “Getting Debt Free, Part Three”

    1. Randy- One other thing about having a home: plan on putting aside, depending on the age and size of your house, another $300-500 per month for updates, maintainance and repairs. This is almost always overlooked.

    2. One method I tell my tax clients if their lender won't do the 2 payments a month, and an easy way to cut the time in half: Pay the current month payment and also pay the next month's principal, instructing the lender to apply to the principal. The extra amount grows each month by a few dollars as you earn more income, so toward the end your extra payment will be as much as your current payment, but this will pay a 30 year mortgage in 15 years, 20 paid off in 10. Works great.

    3. Also for those who cannot find the large deposit or get credit then the lease option is great for getting a big house at low cost. Or for people who look at opportunity cost and don't want to tie up their cash in a non income producing asset.

      1. Negotiate a 20-40% discount (easy in current market)
      2. Pay £1000 down as a goodwill non refundable deposit.
      3. Take over the sellers expenses related to the house (usually to prevent them being repossessed) on a £250K house usually about £600-£700 pcm. (half of this monthly amount comes off the final price)
      4. Put in the contract that you can buy the house at the price agreed any time in the next 5 years.
      5. Live there for 4 years then put it up for sale and sell it before you purchase it at a nice profit.
      6. In the mean time invest the money that was available for deposit in other properties and get a 20% - infinity% return

      Inflation wipes away the debt in that 5 year period (probably halves it) and with the profit gained re invest it or then buy a house with a very large deposit.

      Need to look at the money tied up in the asset. Don't mind paying 6% for 20 years if the money I kept out of the house is making at least 20% and inflation is eating the debt.

      1. Make sure you make your payment directly to the bank. If the 'seller' keeps the cash the house could still go into foreclosure and you will not have a leg to stand on AND your deposit is gone.

    4. No money down mortgages are a bad idea when the price is stupidly over inflated and then borrowing 100-130% at 6% when a person has loads of bad debt and a tiny income.

      Good thing about the lease option is that if the deal goes bad you can just walk away from the deal and the current owner keeps the £1000 deposit and rent up to that period.

      It is a great way to build a portfolio and protect the downside
      This way we are only risking the initial money and the rent (even better if we rent it to someone else in the 5 year period)

    5. I agree with the primary premise of getting out from under your largest consumer debt as soon as you can. I do not agree with the strategy of paying into a lenders acceleration plan of weekly of biweekly payments. Yes, you will make the equivalent of a thirteenth payment per year. If you are early in the mortgage the majority of the payment will be interest and of no benefit to you only your lender. You would be better off to pay into a bank account on a weekly or biweekly basis and pay the mortgage on a monthly plan. Once a year take the excess funds accumulated in the bank account and pay it to the lender as a 100% principle payment. That way you get the maximum benefit and the mortgage will be paid even sooner.
      There are a few other ways to pay off mortgages even sooner for the right people.
      JMD

    6. I've been a fan of Dave Ramsey for several years. How are your beliefs - if any - different from his? Just curious. Thanks!

    7. Thanks Randy, a home is a huge commitment. Thank God, mine is fully paid up. At my advanced age, it is good to be debt free.

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