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  • Saving Money vs. Being Debt-Free

    Our public school district is in serious dire straits, so I’ve been thinking about life five years from now. While I feel reasonably confident our current elementary school will be okay, in five years, our oldest will be heading into sixth grade and off to a middle school. The problem is that I’m finding it difficult to find a really desirable public middle school. I’ve had my eye on the Sherman Oaks Center for Enriched Studies, which has a great academic reputation and goes from fourth through twelfth grade, but it’s incredibly difficult to get into. Even if I did everything possible to maximize priority magnet points, our odds of getting in will still be slim because of the lottery system.

    So we would really like to have private school on the table as an option in five years. But that will require money, and a lot of it.

    At the beginning of the year, I said that I wouldn’t have any financial resolutions for this year and that I just wanted to get used to living on one income. But we seem to have done that, and I couldn’t help taking a closer look at our mortgage, which is our only remaining debt.

    Ever since we became otherwise debt-free in 2009, I’ve toyed with the idea of paying off the mortgage. We pay a little extra every month, but only enough to accelerate the payoff by a couple of years. But. We could pay off the mortgage in five years if we save aggressively.

    Unfortunately, it’s hard to predict the future. Is it better to pay off the mortgage and free up the mortgage payment in our cash flow in five years? Or would we be better off saving the money and having a huge cash cushion that we can use to pay for tuition?

    I don’t think there’s a right answer, at least not at the moment when there are so many unknowns, like how much tuition would be. My projected calculations show that if tuition at the top schools continues to rise at the same rate it has been, it’s going to be in the neighborhood of $40,000 per year at the most expensive schools. I’m not sure we would opt for a school like that, even assuming we got in, because it’s so expensive. But even a moderately priced school is going to be around $20,000 per year, and we’ll have to pay twice that for two kids for five years (and then there’s college).

    So for now, we’re going to play it safe. It’ll be like last year, when we were aggressively saving so I could quit my job, only we’ll be saving for five years instead of one now. I’ve got a spreadsheet set up to track our progress, just as I did last year. And just like last year, we’ll have to be diligent about doing all of the things I recommend in the Ways to Make & Save Money series. My goal last year was ambitious but we did it – hopefully, we can do it again!

    The Effects of Becoming a Work-At-Home Mom: Refinancing Our Mortgage Again

    Early last year, we refinanced our mortgage because rates had gone down enough that we were able to get a rate that was 7/8% lower. This time, we will get a rate that’s another 2/3% lower, so we’ll be at 4.125% (I’m hoping that it will be even lower by the time we close, though I don’t think that’s going to happen).

    The last time we refinanced, I was all about saving money and lowering our overall payments. But back then, I didn’t foresee myself no longer working at this point in our lives.

    This time, I am all about the lower monthly payment. After all, I’ve quit my job and make a miniscule fraction of what I used to make.

    We can certainly continue to make our monthly payment now, but I like the wiggle room that a lower monthly payment will give us. And we’ll continue to pay extra on the mortgage, just not as much as we used to. We may, in the long run, end up paying more for the house than we would have if we hadn’t refinanced. But we’re confident it will be worth it – I am so much happier now than I was when I was working full-time, and I think that as the kids get older, I’ll be even happier that I am around a lot. I’ve always wanted to have the house that the kids hang out at after school, so I know what my kids are doing.

    I have to admit though, that I’d forgotten how much paperwork is involved in a refi. And, I’m waiting for the appraiser to arrive right now!

    Does the mortgage interest deduction make carrying a mortgage worthwhile?

    Since announcing our intention to pay off our mortgage in six years, I’ve been asked if that’s wise, given that the interest on a mortgage is tax deductible. The short answer is, it doesn’t really matter to me. Paying off the mortgage will free up a lot of cash flow, which in turn will open up lots of options for us – options that I most definitely want to have in six years, because they may include things like the very expensive private school that we can’t afford right now.

    The long answer is – no surprise here – it depends – on whether you can earn more money with the extra principal payment than you would save by paying off that amount of principal. The math gets kind of complicated (at least for me), and I’m not a CPA or tax lawyer, so let me know if I haven’t got this right.

    Let’s say that you’ll pay $10,000 in mortgage interest this year and are in the 25% tax bracket, meaning that you’ll pay $2500 less in taxes thanks to your mortgage. Let’s also assume that if you pay an extra $250 per month in principal, you’ll reduce your mortgage interest to $9,000, and therefore reduce your tax deduction to $2250. In other words, you’ll end up paying $250 more in taxes this year because you paid off $3000 extra in principal ($250 x 12) . But you also paid $1,000 less in mortgage interest, for a net gain of $750.

    Now, suppose you could take that $250 per month and invest it somewhere and earn more than $750 over the course of the year (plus more, to cover the taxes you’ll owe on the extra income). Then theoretically, you’re better off not paying extra on the mortgage but going with the investment instead. However, it also occurs to me that the math ought to be even more complicated because the mortgage interest savings are probably compounded over the life of the loan – that sort of calculation is way beyond my abilities, so I’m not even going to attempt to go there.

    In my case, I haven’t run the actual numbers to see if we could earn more via investment than we’ll save by paying off the mortgage early. I don’t even want to attempt those calculations, and in any event, it doesn’t matter because I would predict the gain wouldn’t outweigh the options that I’m looking forward to having in six years. And for us, that’s what really matters.

    We are debt-free! (Except for the mortgage – here’s how we did it)

    I sort of slipped the big announcement into a previous post, but we are now debt-free!

    Except for the mortgage.

    The funny thing is, I’ve been looking forward to writing about being debt-free for a long time. When I made the final payment on our last non-mortgage debt (a student loan), I had big plans to write about how we accomplished it, and how good it feels to not have any debt. (I was just waiting for the official “congratulations, you’ve paid off your loan!” letter.)

    But after paying off that last loan, I turned my attention to our mortgage. And that’s sort of taken away from the accomplishment of paying off all of our other debt – because the simple fact is, we’re still in debt.

    A big part of why my sense of elation at paying off the last of our non-mortgage debt has been diminished is that I can see how much more freedom we will have when we no longer have the mortgage. So while I’m still excited that we’ve paid off our other debts, paying off the last non-mortgage debt doesn’t feel that different from paying off the debts that we finished off before that.

    I’ll be really excited when we have paid off the mortgage. Because if all goes according to plan, we’ll never need to borrow money again. (Unless we decide to move, in which case we may need another mortgage, or make a big investment, like buying rental property – neither of which is likely to happen, however.)

    Here are the steps we’ve taken to ensure we can pay off our mortgage quickly and hopefully never need another loan again:

    We don’t just live within our means – we live well beneath them. We are lucky that we can do this, of course, while still maintaining a comfortable lifestyle. But we worked hard in school and after graduation, and made wise choices, to get to this point in our lives.

    We pay off our credit cards each month. This goes along with the first point, of course, in that we don’t spend more than we can pay off. Some of my favorite bloggers, like No Credit Needed, don’t believe in using credit cards at all. Personally, I’m okay with credit cards as long as I’m not spending frivolously and can pay off the balance each month. The convenience and rewards are worth it. (And remember that failed all-cash experiment last year?)

    We save money each month. One of the first things we did as a married couple was build a nice emergency fund. It’s grown over the years, as our family and obligations have expanded. We continue to add to the fund each month, and this helps to ensure that we won’t need to borrow money in the event of a major financial need.

    We set aside some money each month for the next car payment. After we paid off our last car loan, I started making monthly deposits for the sole purpose of buying a new car with cash in four to five years. We may need to draw some money out of our savings account to complete the purchase, but we definitely won’t need to take out a loan to buy the car.

    We use the debt snowball method. I love the debt snowball. Ours has grown a lot over the years, and will now be used to pay off the mortgage. A portion of every regular increase in income (i.e., salary raises) and decrease in expenses (e.g., lower insurance premiums) has gone toward the debt snowball. Our nearly decade-old snowball is now big enough that we will be able to pay off our mortgage in about six years. I can’t wait for that day!

    Previously: How I’m paying off my student loans

    Warning for new mortgage holders: Ignore that biweekly payment invitation

    We refinanced our mortgage in January, and that meant we got a new lender. In today’s mail was an invitation to enroll in the lender’s biweekly payment plan which “does the work” to help me pay off my loan faster by automatically deducting half of my regular monthly payment every 14 days. The way the math works out, I would end up making 13 “full” mortgage payments each year, theoretically without feeling any pain. According to my lender’s calculations, I would pay off my loan 4 1/2 years earlier and save over $34,000 in interest.

    Um, no thanks. I can manage that “work” on my own perfectly fine. I’ve planned all along to pay extra principal each month, and now I plan on rolling my debt snowball into the mortgage once my student loan is paid off. That’ll result in the mortgage being paid off 23 1/2 years early and over $100,000 saved in interest.

    What really staggered me was the cost of the biweekly mortgage plan. The lender must make a fortune off of anyone who signs up. There’s a $375 enrollment fee, plus a $1.50 transaction fee with each payment. With 26 payments, that’s an extra $39 each year!

    I hope no one pays these fees, because they’re outrageous. In these economic times, you’d think lenders would actually just be grateful to have a customer who pays on time!

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