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  • Becoming debt-free: Sometimes you just need to believe it’s possible

    We are very close to paying off my remaining student loan, which would leave us with the mortgage as our only debt. For some reason, I had assumed until today that we would shift what we’ve been paying on the student loan into savings for retirement and the kids’ education. It had simply never occurred to me to wonder how long it would take to pay off the mortgage if we continued the debt snowball.

    Until today.

    Out of nowhere, I began to wonder would happen if we applied the student loan payment to our mortgage. I was shocked to see that we could pay off our mortgage in just over six years.

    So that’s the new plan: Pay off the mortage by mid-2015. We’ll save over $100,000 in interest. I was a little concerned that with our new plan, refinancing in January may have cost us money, but I’m happy to report that we’ll come out ahead by $5,000 (i.e., if we hadn’t refinanced and started accelerating the mortgage in a few months, we’d have paid $5,000 more than we will now).

    Of course, nothing is set in stone. The new plan presupposes that we’ll be sending the boys to public elementary school or a very affordable private school, and that my husband and I will hold on to our jobs. With the current state of the economy, I don’t want to take anything for granted. But even with the extra principal payment each month, we’ll still be able to save, as we have done while paying off our non-mortgage debts, so we will remain financially stable.

    And the end of being in debt is in sight!

    Random thoughts: Spaghetti carbonara, slow cookers and irresponsible finances

    Feeding the kids: A success story!

    I tweeted about this on Wednesday night, but wanted to mention it here as well. Dinner that night was spaghetti carbonara, which I made with whole wheat spaghetti, cheese and eggs. (I’ll publish the recipe next week.) Alex actually ate it. And he didn’t just eat it, he loved it. We did have to persuade him to try it in the first place, but Marc and I are jointly sticking with our plan to raise healthy eaters. So far, so good! (Although I must admit that I couldn’t get Tyler to even take a bite of the pasta.)

    Mainstream media is behind the curve again

    The LA Times recently published an article about the resurgence of slow cookers. They even mentioned Stephanie from A Year of CrockPotting, but since there were no recipes accompanying the article, it was kind of lame. But maybe it was worth it, because I found an LAT blog post about a non-electric slow cooking method used in Zimbabwe involving pillows. I need to win the Le Creuset giveaway over at GoodyBlog before I can try it, though.

    I’m sick and tired of people who are financially irresponsible!

    Almost every day, JLP at All Financial Matters posts about how financially responsible citizens are going to be stuck subsidizing our financially irresponsible brethren (like this post on Wednesday), and I have to agree that it’s infuriating. I just heard about a friend of a friend who works for a large law firm and has a $6,000 monthly mortgage payment. My jaw dropped. I didn’t realize that it’s even possible to have a mortgage that big.

    I’m guessing that the mortgage must be in the million-dollar range, and the rough description and location I was given match that price. I would guess that this attorney’s income is about $250,000 per year. To the best of my knowledge, the attorney is single and lives alone, so there’s no one else helping to pay the bills, nor is there another source of income or other assets (e.g., a family trust). If the attorney were fired – and it’s not exactly improbable given all of the layoffs happening at firms lately – the house would most likely go into foreclosure.

    I just don’t understand how anyone could think – even in overpriced LA – that a $6,000 per month mortgage is a good idea. A good-sized condo in a nice area can be rented for $2,000 per month or purchased for $500,000. Even a small house could be purchased for $500,000. Granted, life at a large firm is so miserable, spending money is often the only way to make it tolerable – but in that case, I would say get a $3,000 mortgage, blow $1,000, and bank the other $2,000 for the day you can’t take the large firm lifestyle any longer. People are just crazy.

    Update on our refi: We closed yesterday at 4.875%

    We finally signed the closing documents for the refinance on our mortgage yesterday. After fees, the math works out to an APR of just over 5%, and of course, APR is what really matters when it comes to figuring out our savings. We plan on staying in our house forever, and to continue paying the same amount that we do now, so the benefits of our refi will be substantial. We’ll save over $30,000 in interest and pay off our mortgage in 2031, two years earlier than our current payoff date in 2033.

    It must be awful for the escrow company’s notary to have an attorney come in to sign closing documents. I read every sheet of paper and questioned multiple figures. I also questioned a couple of whole documents, including one that was completely irrelevant that we didn’t have to sign. It was an IRS form permitting the mortgage company to obtain copies of our tax returns – the form itself said something like “If completing form for a third party, do not sign if Lines 6 and 9 are blank” and of course, Lines 6 and 9 were blank. The notary had to call the lender, who said, “Oops, they don’t need to sign that.” I’d like to think nothing bad would have happened even if we’d signed it without reading it, but I hate to think of all the people who have given lenders permission to obtain their tax returns when it wasn’t necessary.

    Finally, while we plan on paying extra on the principal every month, I must admit that a tiny part of me is glad to have the reduced monthly payment – just in case something bad happens and suddenly that $200 monthly difference becomes significant.

    Now I just have to update our list of accounts.

    Why are mortgage rates going up?

    You might recall that we’re in the process of re-financing our mortgage at a rate of 5.125%. The rate came with two float downs, so if the rate drops before we close, we’ll get the lower rate.

    Unfortunately, even though the Federal Reserve has since lowered the federal funds rate, the rate at our lender has gone up to 5.375%. That made me curious. I’ve known for a while that the mortgage rate often doesn’t drop following Fed cuts, but I finally wanted to know why that is.

    The best explanation I could find was this About.com article, which states that rates are based solely on Mortgage Bonds or Mortgage Backed Securities, and therefore are slower to react to rate cuts than other financial sectors. I still don’t understand why mortgage rates go up when the trend should be down, though.

    Are rates going to stay where they are or maybe even go higher? I hope not. I’m being cautiously optimistic that rates will go down again because the Fed is still buying mortgages. And we still have some time.

    We’re Finally Re-Financing Our Mortgage

    I’ve mentioned several times in the last year that I’ve been keeping an eye on interest rates to see if they fall low enough to make re-financing worthwhile. And they finally have.

    We’ll be re-financing at 5.125% or lower. Thanks to some special programs that we’re eligible for, we got a low rate with a 60-day lock and two float downs, so if rates go down between now and when we close, we’ll be able to get that lower rate. The loan officer said she thinks rates will go down in the next few weeks, so I took her advice and took the 60-day lock at 5.125% instead of a 30-day lock at 5% with no float down.

    Calculating whether the refi would be worthwhile involved enough numbers to make my head spin, but the loan officer ran the numbers with me a second time and confirmed my conclusion. A key factor in making the refi worthwhile is our commitment to continuing to make our current monthly payment even though the minimum payment will be lower with the new loan.

    Here’s an example of the math (I’m using round numbers for the sake of privacy and convenience – and remember, if the balances seem high, they’re normal or even on the low side for Southern California):

    Current mortgage
    Current balance: $230,000
    Current interest rate: 5.75%
    Current monthly payment: $1460
    Interest paid to date: $78,300
    Interest that would be paid over life of the loan: $275,215

    New mortgage
    Balance including closing costs: $235,000
    New interest rate: 5% (I’m gambling that it will go down at least this much)
    Interest paid over the life of the loan making the same monthly payment as above: $175,740
    Total interest paid on this loan plus interest paid on previous loan: $254,040

    Difference in interest paid between the two loans: $275,215 – $254,040 = $21,175

    So that’s a savings of $21,175 in this example, and the loan will be paid off in 25 years instead of 30. In our case, the numbers work out to a savings of about $30,000 over the next 22 years, and we’ll still pay the mortgage off two to three years before our current mortgage (assuming no extra principal payments).

    Of course, we can always increase our savings by paying more extra principal each month, and it’s likely we’ll do that. Still, I can’t help but wish the savings were greater (and they may be if the mortgage rate goes down further before we close). But in any event, for just a few hours’ investment, we’ll have saved ourselves $30,000.

    Maybe it’s time to think about re-financing your own mortgage? . . .

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