This & That: Crazy House Edition
Posted by Gail | Filed under Credit Wise, Home Buying, This & That
Getting your mortgage paid off at all costs while racking up debt on your line of credit or credit cards is one of those Stupid Debt Tricks I sometimes talk about. So is taking on so much house you can’t afford to eat.
A wrote:
I am a stay at home mom of 3 kids (10, 5 and 5mths) My husband is the sole provider. I do work at a salon as a nail tech maybe 3-4 times a month. My husband brings home $3200/mth and our mortgage is $1900/month. Which doesn’t leave much room to pay bills, buy groceries and everything else needed on a mthly basis. I feel like i am not doing my job as a stay at home mom, when i have to tell my family that we can’t do or buy something because we can’t afford it, which of course, puts tension on everyone and i feel like the “BAD GUY” saying no. I find myself transferring money from our line of credit every month just to get us through the month. How can i make my husbands paycheck go further?
A, the reason you can’t make ends meet is because your mortgage is eating almost 60% of your income… never mind house insurance, property taxes, utilities and maintenance. Clearly you can’t afford your home. You can either sell it and move somewhere cheaper, rent some space in it to generate revenue, or open an at-home business so you can at least generate some income and get some tax write-offs. Or you can keep on handing over great gobs of your money and relish in your home while you remain House Poor.
M wrote:
We have a mortgage and a HELOC. Because of recent mortgage rate drops, our HELOC is at a lower rate than our fixed rate mortgage. We are attempting to pay off debt as fast as possible. Should we always pay the higher interest rate debt first (in this case pay the minimums on the HELOC, and make additional payments on the mortgage) or should we pay down the LOC in case of emergency?
M, because your line of credit is consumer debt and is “callable” –meaning the lender can ask for it at any time — even though it may be at a slightly lower rate, it makes more sense to get it paid off in full first and then focus on your mortgage.
Fiona wrote:
My husband (46yrs) is a Pilot and I am a stay-home-mom. He earns a decent income and we are not frivolous people. We are trying to pay off our mortgage ($135,000) faster by shortening our amortization (5yrs) and paying bi- monthly (our current mort rate is 1.5%). We have also been doing renos for the last year (all by ourselves to save cost) and using the line of credit to help fund it, it is at just over $6000 and also at 1.5%. Here finally is my query. Our housing costs eat up over 50% of his income. We have 2 very active boys involved in hockey and summer sports. Your Budget Worksheet shows that we keep coming up with a short fall every month I’m sure due to the fact that our housing is so high. Is it more beneficial for us to skimp even more on everyday living (we don’t do much as it is) or should we give ourselves a break on the mortgage?
Fiona, why are you hell-bent on having your house paid off in 5 years? If it’s strapping you so tightly, you need to revise your goal. Having the mortgage paid off and ending up with money on the line of credit is self-defeating. Sit down with your husband and make a reasonable plan for paying off the debt WHILE YOU HAVE A LIFE. Yes, it’s important to eventually own your home. Doing so at the cost of having a life doesn’t make any sense. Spread your amortization over 15 years, roll in your line of credit, and get some balance into your life.
KK wrote:
I’m a 27 year old, single professional and currently top up my RRSP to the full amount every year, maximize my TFSA and have an emergency fund tucked away to last 6 months (without EI), 10 months (with EI). I have a mortgage with a fixed rate of 4.2% that I locked in 4 years ago that has the option to make down payments every year up to 20% on the anniversary date. I’m not considering breaking my mortgage to get in on the low mortgage rates because the best I can probably find right now is 3.9% for a 5 yr fixed rate. Taking into account the penalty fee (3 months interest) and the slight difference in rates, I don’t think it’s worth the trouble and I am hoping the mortgage rates will stay low when renewal time comes along 1 year from now. Do you think I am making a wise decision on this? Also, with the way things are going (ie. BoC rates staying at 0.25% until at least mid 2010), should I use my TFSA and any extra money I have saved (outside of RRSP/Emerg) to pay down my mortgage? I figure I can pay down the mortgage, which would reduce the bi-weekly accelerated payments and save on interest payments. I also figure the rate difference (4.2 vs. 1.2%) would also mean the money is better utilized to pay down debt than leave it sitting in a bank. I am hesitating because with the economy as it is, I don’t know if I am making the right decision to do this vs. fattening up the emergency fund. What do you think? Also, an alternative to paying down my mortgage is to pay off my car loan (non-secured) which is at 6.8% that I got 3 years ago. I have 2 years left on the loan. Instead of paying down the mortgage, should I pay off the car loan? I know normally on the show you say to “pay off the debt with the highest interest rate first”. I’m confused because when I calculate out how much I could save in payments ($1560) and interest ($798) on the mortgage vs how much I could save in interest payments ($735) on the car loan for the next two years, it looks like I would save more by paying down my mortgage even though it has a lower rate of 4.2%.
KK: What a thoughtful question. It’s nice to see a body thinking so clearly. You’re right when you say that paying down the mortgage gives you the biggest bang for your buck in interest saved over the long term. But if that were the only criteria, then blowing out the mortgage would be the number one goal and that actually doesn’t work when you’re building up debt on the other side (consumer debt). Since your home is likely to appreciate and your car is only going to depreciate, spending money on interest costs on the car is really throwing money away. So if it were my decision to make, I’d pay off the car loan and then, if I was hell bent on getting rid of the mortgage, take the old car payment and use it to make extra payments against the mortgage. Good luck, and good thinking!
EE wrote:
In our family there is an ongoing debate about mortgage debt. My husband and I choose to pay off the mortgage, while my cousin (who is a real estate agent) keeps telling me to stop looking at the mortgage as a debt. We owe about $86,000.00 and we want to have that paid off sooner than later. The debate is that it is silly to pay off your mortgage. My cousin and her husband have just had a $450K renovation done…house is beautiful. Where is the line between good debt and bad debt and are we depriving ourselves of great things by choosing to pay our debt faster?
EE, any time you have to pay interest your costs are higher. So while a mortgage is considered good debt because you’re building assets, that doesn’t mean you should hang on to your mortgage for as long as possible. You and your husband have the right idea. Don’t kill yourself to get the mortgage paid off. Have a life, but keep paying that sucker down!
K wrote:
In the current economic climate, are banks recalling mortgages on homes that are worth less than what the mortgage is at? Should we be concerned about losing our house in the event that this may happen?
K, I haven’t heard of such a thing happening and think it unlikely if the borrowers are up-to-date with their payments since to call the mortgage would necessitate selling the house at less than perhaps is on the mortgage.
Karen wrote:
January 2008 we relocated for work, at the same time I was diagnosed with cancer. I have come through treatment and I am cancer free. However the job the I relocated for is no longer an option for me. I now have to return to my home base, which will be over an hour commute. So we have listed our home to return back to the town we came from. There are a few issues, 1. The market is very high, so it is more expensive to get back in. 2. We want to have a lower mortgage because we want to get rid of our debt. 3. Our penalty for breaking our mortgage is $17,000 unless we keep the same mortgage of $285,000. Should we buy a cheaper house to have a lower monthly payout and pay the penalty or do we get a mortgage of the same amount so we don’t have to pay the penalty?
Karen, congrats on coming through your treatment successfully. I’m sorry there have been some disappointments with work and that you feel strapped now. It won’t be like this forever. You’re wise to want to minimize your mortgage costs, but the only way to get around the interest penalty is to take a mortgage of the same amount or more. If you go with a lower mortgage, there’s no way around the interest penalty. Of course, the fact that you pay a penalty should not drive your decision to buy a bigger home. Buy a house you love, that you can comfortably manage financially and eat the penalty.
June 24, 2009 at 7:52 am
I should cut out this article and frame it in my office!!!!!!!….I have met several people in my job who are crippled with astronomical credit card debt because they are putting every penny they have on their mortgage in order to be mortgage “free”…soooo crazy…I have even met folks that are in collections because of the consumer debt but their mortgage is fast tracked….crazy….a good conversation with some good calculation tools and I have been able to help some folks get on the right track…paying down the 19% debt before the 3% mortgage…having some savings…then when the consumer debt is gone they can focus on putting those dollars against the mortgage…that way when the mortgage is paid off you won’t be looking for another one just to pay off all the consumer debt!…talk to your banker…we have a brain and can help:)…especially if we read Gail each day..lol…:)
June 24, 2009 at 9:19 am
I love these ’round-up’ posts Gail! Its great that you answer so many similar questions at once. I think it must also help people feel like they are not alone.
Thanks!
June 24, 2009 at 10:55 am
KK – another good reason to pay off the car loan first is that you have eliminated a minimum monthly payment… right off that bat, that automatically extends the length of time your emergency fund can support you, which is a nice security bonus. And, if times are good, you can just take those car payments you were making and make extra mortgage payments, and overall you’ll be way ahead.
June 24, 2009 at 12:11 pm
Nice, clear answers!
Mortgages hit “close to home” (pun intended) for so many people.
My sister and I are like night and day on this front. She has no problem maxing out with the highest mortgage they qualify for 35 years so they can get more house. That’s their preference, and hey they have a nice house that they will be paying towards for the longest possible term. If the value appreciates and they keep making 2 decent incomes, and the interest rates stay sane, and there are no major repairs, and they are happy there, then hooray for them, they will be fine!
My comfort zone is nowhere near theirs! I want a mortgage that can be easily maintained on ONE income, and I need to know that if anything happens we have the safety net in place that we won’t be homeless. Our home is small, modest and frumpy (in comparison), but by staying satisfied with what we have for the last 10 years, we have only about 7 years left to pay! And I might add that unlike my sis starting with zero equity right now, my smaller home is today worth almost 3 times what we bought it for (thanks to making repairs and improvements as needed to keep up it’s maximum value — without needing to add debt)!
June 24, 2009 at 2:09 pm
I like the distinction between good and bad debt. I know at least two people who are scared to death of buying a house, even though they’re VERY fed-up with renting, because they’re terrified of any kind of debt (their parents had to declare bankruptcy when they were just old enough to start to understand how really scary that is). I don’t disagree that debt stinks, but I really think it’s worthwhile when it comes to owning your own home, so long as (like you said) the mortgage isn’t eating you up. That said, of course, I’m not about to push them into buying a house when they’re not comfortable with it (I just kinda wish they’d come to terms with renting if they’re that set on not buying, since the only other option I can think of is moving into a cardboard box under a bridge somewhere).
The one thing I wish people would consider (as opposed to taking on more mortgage than they can handle) is maybe waiting a couple years longer and building up a bigger downpayment than is strictly necessary (and without borrowing to have that downpayment!) In five years, God willing, we’ll a downpayment worth 30%-35% (as opposed to the 20% recommended) of the house value we’re looking at, which will save us interest without adding to our monthly mortgage payments. If you don’t mind waiting a bit longer before owning, I think it’s well worth it!
June 24, 2009 at 8:32 pm
KK says: “should I use my TFSA and any extra money I have saved (outside of RRSP/Emerg) to pay down my mortgage? I figure I can pay down the mortgage, which would reduce the bi-weekly accelerated payments and save on interest payments. I also figure the rate difference (4.2 vs. 1.2%) would also mean the money is better utilized to pay down debt than leave it sitting in a bank”
Interesting. Our financial advisor says we should take our TFSA $$ and put it on our LOC. The interest is 1% on the TFSA and 2.5% on the LOC.
I have two minds about this. I like knowing I have the cash if we need it. My TFSA is an emergency fund and hubby’s is for our next new to us car in about 3-4 years. On the other hand, I’d love to lower the LOC. We meet with our advisor on July 20th so will decide then.
Any comments or suggestions here????
June 24, 2009 at 11:57 pm
Catherine:
Is your EF for both emergencies and pre-planned home spending?
Can you pay off your LOC using 15% of your take-home and balance the budget?
Personal belief: NEVER less than 3-months in EF and save towards 6-months. The less the jobs are secure, the greater the need for a 6-mo EF.
June 25, 2009 at 3:12 am
This & That: Crazy House Edition…
Getting your mortgage paid off at all costs while racking up debt on your line of credit or credit cards is one of those Stupid Debt Tricks I sometimes talk about. So is taking on so much house you can’t afford to eat.
A wrote:
I am a stay at…
June 25, 2009 at 6:52 am
Catherine, I’m not sure the see the benefit being offered. If your TFSA pays 1% and your loan costs 2.5% you’re paying 1.5 times more interest than you’re earning. How is that in your best interest? Since you already have access to your line of credit, moving it to your TFSA simply activates the interest clock. I can see what’s in it for the lender: profit. What’s in it for you?
June 25, 2009 at 9:12 pm
My and me GF have a good amount of spare money left, after all the fixed+variable monthly expenses are paid for. I still think paying down the mortgage agressively and the LOC more slowly makes sense for our scenario. The reason is that our mortgage is too large for my confort level, and I want to be mortgage free about 5 years before my pension. Furthermore, my LOC rate is 2.41% and mortgage is 5.22% for 5+ years. We have no credit card debt, car payments, or furniture payments, but a $25K LOC and $308K mortgage.
June 27, 2009 at 5:39 pm
I agree: racking up credit card or LOC debt just to knock down your mortgage principal is crazy under most circumstances.
However, I will also say this. I personally have found that the key to money management is to set goals and to stick to those goals. One of my goals was to get my mortgage principal below $100,000 this summer. Even though I have other debts I elected to make a couple of extra mortgage payments now, then get to work on my other debts. I don’t see the harm, because my mortgage rate is 5.9% and I have a LOC at 5.0% and credit card at 5.8%. My mortgage agreement allows me to skip a payment for every extra payment I have made, so I can always redirect that money to my LOC if it becomes a problem.
June 29, 2009 at 11:26 am
I thought I would post this advice on the controversial subject of paying off mortgage. “Smart investors skip RRSPs to pay down mortgage now”
http://www.aaron.ca/columns/2003-02-01.htm
July 7, 2009 at 7:57 am
Excerpt from above article:
Most of the internet sites discussing the question of RRSP contributions vs. mortgage paydown are written or sponsored by organizations or investment advisers who earn their income on commissions from RRSP contributions. Nobody earns a fee when a homeowner pays down his or her mortgage.
As a result, it is good to take the advice from some sources with a grain or two of salt.
I found one of the best unbiased pieces of advice on the web site of investment guru Gordon Pape, http://www.gordonpape.com. The question and answer portion of the site asks, “Is it better to pay down your mortgage while the interest rates are low or is it wiser to take the extra cash and put it into mutuals or some other investment vehicle?”
The answer, which overflows with common sense, is, “Consider it in terms of after-tax return. Say you’re paying an interest rate of seven per cent on your mortgage. If your marginal tax rate is 40 per cent, you have to earn more than 11.7 per cent a year on your investments, every year, to come out ahead.”
“If you use a lower marginal rate, say 30 per cent,” it continues, “and invest in securities that pay mainly dividends and capital gains, you still have to realize better than 10 per cent annually. Perhaps you can achieve that. But the mortgage paydown is a sure thing.”