How To Pay Off Your House In 9 Years

Is it possible to pay off your 30 year mortgage in just 9 years? Of course it is and it is not as hard as you think.  But first, lets see why this is a good idea.

Do you know how much interest you pay on an average 30 year note?  No?  Let me give you an example:

Suppose you buy a house for $220,000 and you get a mortgage for $200,000 for 30 years at 6% interest rate. 

In 30 years you will have paid a total of $431,677.  Ouch!  You paid more than double the price of your house.

Now let’s say you bought the same house and got the same $200,000 mortgage at 6%.   Your monthly payment will be $1199.

How much do you think it will take to pay off that house in 9 years?  Tens of thousands of dollars a month?  How about $5,000 a month more?  Nope.  This is the formula:

Double your monthly mortgage payment and you’ll pay off your house in 9 years.

How much did you save in interest?  Just $172,245!

That’s right.  In this example, sending the bank an additional $1,199 a month will have you house debt free in 9 years.  What’s amazing is this formula works no matter what your mortgage payment amount is.  If you’re only paying $800 month, an additional $800 will do it.

I know, I know, your finances are redlined and you bought more house than you should so you can’t afford to send double the monthly payment.  Ok, how about one third more?

Again, instead of sending in $1,199 on your 30 year $200,000 mortgage you send 1/3 more or $400 more a month.  Now you pay off your house in 16 years and change.  This formula works for any mortgage amount.

Yeah so you really messed up and can only send a tenth or a measly $120 more a month.  Well that gained you a little over 6 years of payments so now you payoff your house in 24 years instead of 30.  Not a big deal right?  Well it still saved you $28,164 in interest over the term of your loan.

So there you have it, send in that extra principle and watch your nest egg grow!

Ps. Check out http://www.mortgageloan.com/calculator/mortgage-payoff-calculator and enter your numbers to see how fast you can pay that mortgage off

 

Is Now a Good Time to Buy?

Time and time again I hear the same question, "Is now a good time to buy Real Estate"

Here's a general principle that can you can use to make profitable deals whether it is Real Estate, stocks or gold coins: Always go against what the masses are doing. 

When everybody is bullish and making money on Real Estate/Stocks you should sell.  When everybody bearish and losing their shirt on Real Estate/Stocks you should buy.

However, that is not what you or your neighbor do is it?  When home prices go down you get scared and do nothing.  You’re afraid to buy because of all the foreclosures around you, homes being sold for half price, and so on.

Yet when houses were being sold in two days and when you had to compete in a bidding war to get any house you had no qualms in buying.

My friend, if you do what everybody else is doing you’re going to get the results everybody else is getting. 

In general, this is the best time to buy real estate since the 80s.  Cash flows on rental properties are at all time highs.  Houses are being sold for pennies on the dollar.  What is stopping you?

Consider also this.  Would you buy a dollar bill for $0.70?  Of course you would, all day long.  So any time you can buy a house worth $100,000 as is for $70,000 it’s a good buy.

Get out there and buy some real estate for pennies on the dollar!

Should You Buy a House?

A post back we determined that a house is not really an asset or an investment.  It just drains more and more money directly and indirectly.

So the question is, should you buy house then?

The answer is absolutely yes.  You should own your own home. 

Well if a house is not an asset or an investment why should you buy one?

The house may not be your best investment but it is your best forced savings plan.  In the long run homeowners will almost always outperform renters in terms of net worth.

Lets run this scenario.  You decide to rent for the next 10 years so you get a nice two bedroom apartment for say $1,000 a month.  After 10 years and spending $1,000 / month * 120 months = $120,000, what do you have to show for it?  Nothing, nada, zip.

Some smart readers might point out that the money that you saved by renting could have been invested at a 8% return and thus could amass a small fortune.  Yeah that would be the logical thing to do… if you’re a Vulcan (Star Trek geek coming out).  How many renters really invest the difference?  Do you know any?

Now lets take scenario B.  You decide to buy a house and live in it for the next 10 years.  The house is $150,000 and costs you $1,500 a month in mortgage, taxes and insurance.  The payment is high but you manage and you stick with it for 10 years.

After 10 years and assuming a very conservative 3% appreciation that $150,000 house is now worth about $201,000.   Right off the bat you made a real capital gain of $51,000 by literally sitting on your ass-et.

But it gets even better.  If you put %10 down on the mortgage at 6% and owed 90% or $135,000 at closing, after 10 years your balance is now $112,731.21 or about $22,265.79 less.

Even gets even sweeter than this.  All that mortgage interest and taxes you paid on the house are tax deductible.  The savings on this is considerable and will vary depending on your income, number of dependents, etc.

So without counting tax savings, after 10 years of home ownership you made $51,000 of capital gains + about $22,000 in loan pay down or about $73,000.    Owning a house in this scenario made you $73,000 richer after 10 years.  That’s equivalent to saving $400 a month and making it grow at an 8% interest in the same amount time.

In summary, you should own your home for no better reason than to force you to save and not spend it away.  The pride of owning your home… priceless.

You're Probably Sabotaging Your Goals by Just This One Action

Have you ever had a great plan or a dream that you wanted to accomplish?  Did you share it your friends, family, loved ones?

I'm going to guess that you didn't and instead you kept it to yourself.  You might have told your wife but that's about it.

Why is that?  Have you ever thought "there's this thing I want to do but I don't want to tell anyone in case it doesn't happen".  Sure you have.  Often you don't even tell yourself but keep it recessed in the back of your mind.

I believe we all fear sharing our most wild and exuberant plans because if we don't accomplish them we'll look like fools.  We dread the conversation that starts with "what ever happened to your plans to xxx", or "didn't you say you wanted to become a xxx"?

This innate fear is actually a great tool. It is precisely this fear of failing that can help you succeed.  If you have a goal you want to accomplish then telling as many people as you can commits you to getting results.

For many of us the fact that we told someone that we were going to do x or y, is that last push that helps us get over the obstacle and accomplish our dream.

The next time you have a great plan or a great goal, tell as many people as you can.  If you want to be truly committed make a bet like shaving your head if you don't go through with it.

The key here is that you should not be focused on the outcome but rather on the attempt itself. If you had a goal to make $100,000 in a year but only made it to $95,000 did you really fail?

It's better to aim high and miss than to aim low and hit.  

Is a House really an investment?

Lets get this clear. An investment doesn't eat money every month, it generates money.

If you invest in a dividend paying stock or bond it will generate cash for you every month/quarter/year. You don't need to pay the stock or bond to produce. If you send money to a fund every month it goes to buying additional shares of that fund.

If you have an income producing residential rental property your net of your rent minus mortgage, taxes, insurance, etc. will hopefully be a positive cash flow to your pocket every month.

Now lets look at your house. After paying mortgage, insurance, taxes, etc. does it pay you back every month? Not a chance. To add insult to injury that house eats up a lot in decorations, furnishings, upgrades, etc.

The fact that your house may go up in value after a few years does not make it an investment. That's speculation. It's just like buying bare land holding it for years and hoping it goes up one day.

A year ago you might have argued that house prices are going up, up, up. It was tough to sit in the sidelines in Houston while homeowners in the East and West coast were getting 'rich'. Well now that we're back to normal we can assume a historical average of 4% annual appreciation.

With 4% appreciation and after deducting all the expenses associated with a house it can hardly be considered an investment per se.

Does that mean you shouldn't buy a house? Not at all. I believe in the long run homeowners will always come out ahead financially vs renters albeit for different reasons.

So yes, even after all I said go out and buy a house. I'll explain why in the next post :-)

This one belief is probably keeping you from being rich

Do you find it hard to save $$?  

Why is that?  Well on the surface the answer is pretty easy “I don’t have enough money left after my expenses”.  I hear you.  However, I think deep down your subconscious beliefs are what really keeps you from saving.

So here you are staring at that nice new golf club/TV/killer purse/Wii/etc and $500 are just burning a hole in your pocket.  You know you should save that money but your subconscious is telling you that if you stash away that $500 they will just go in a black hole never to be seen again.  

You then talk yourself into it by thinking “pleasure now, or pleasure later when you retire and are too old to enjoy it anyway…”    Sound familiar?

Most of us have been conditioned to think that saving means stashing away money and never seeing it again.  I think most of you know it by the name of 401k. We know our savings are growing (hopefully) but somehow it just doesn’t feel like real money.

Here’s an idea: Invest in vehicles that pay you now.   Huh?

If you had a $25,000 investment making you a 10% dividend you’d be pocketing $2,500 a year, every year.  Think about that.  It’s like getting a $2,500 bonus check year after year for not doing anything.

If you know that every $500 you invest will pay you $50 back every year would you be more inclined to invest?  That golf club doesn’t look that attractive any more does it?

What's Better, to Save a Dollar or Earn a Dollar?

Would you rather earn a dollar for your products or services, or save a dollar when buying or not buying something?  Sure this seems silly but the implications and ramifications of this question extend beyond just one dollar.  

Lets say you save a dollar.  Ok that's one dollar less I would've spent. Simple. 1$ = 1$.

Now lets look at earning a dollar.  I have one more dollar in my pocket right?  Well, actually no.  That dollar you earned is actually taxable.  You'll have to pay income taxes, social insecurity taxes, fica, etc.  Your dollar earned is actually worth only $0.80 or so.

Now instead of a dollar make it $10,000 or $100,000.  It makes a big difference eh?

ps. The trick here is earned.  There are some ways you can make a dollar without paying taxes or at least deferring them indefenitely.

Nothing is Purchased in Isolation

Everything costs more than it seems. Well that’s a general statement but what I mean is that anytime you budget for something you’re going to purchase be assured that it will invariably cost more than that original amount. You see, there is a universal law that says:

“Nothing is purchased in isolation”

Take for instance something as simple as an ipod. Lets say you budget $150 and then you go buy it. Well now that you have an ipod you might be compelled to buy some music to listen. So you say download music for free. Fine, but what about storage. Now with so many songs and video you downloaded you need a new usb drive to store it, or a whole new computer. You’ll at least buy a new skin for it, or a replacement set of earphones.

The point is that your one purchase will most probably beget more purchases. As items get more expensive so do the correlated items that go with it. A car begets gas, oil changes, tires, car washes and air fresheners. A house begets furniture, home improvements, etc.

So my friends, remember that if you’re ready to spend on that new item realistically budget for twice that amount over its useful lifespan.

Never ever ever finance a car

Lets get straight to the point. Cars should only be bought with cash. Financing is for wimps. Ok I’m glad I got that off my chest. Now let’s elaborate.

I can hear you now “But I only have $5,000 in savings and that nice BMW I want is $35,000…” Well my friend in that case look for a nice $5,000 used Corolla. That’s what I did. Actually I bought it from my sister but still I’ve paid cash for my last two cars.

So whats the harm in financing? That if have to finance it then YOU CANNOT AFFORD IT! First of all simple math will show you that you end up paying almost double financing than if you paid it cash. However, that is not even then real damage. The real damage is the opportunity cost. You cannot afford to eat that cash flow now and sacrifice future returns.

Lets do some simple math. $3,000 down on a $35,000 car financed at 6% for 5 years yields a $618.65 a month payment (ignoring insurance, registration, etc). Instead, lets invest that $618 a month and lets say it earns 8% return, at the end of five years you’d have $45,408.69! Lets say you keep that up for another 20 years and you’d have a nice $364,014.61 in your bank account.

That nice $35,0000 car actually cost you $360,000 in the future. And that’s why my friends you cannot afford it!

Layoffs and the Perpetual Job Paradox

Everyday we hear the news of more layoffs everywhere. Perhaps even within the company you work for. Most of us take it as a big shocker.

Lets think about that for a moment. When you got hired by your company did they guarantee a job for perpetuity? Did you assume you would work there until you retired? My friends jobs are only temporary and they should be treated as such.

Most workers treat their current jobs as a never ending source as cash flow (see my post about redlining it). That's why most advertisers get you by pricing items as X $ per month. Oh yeah, I can afford it because every month I make $xx.

More so, since most believe their current job will never end then there's no need to sharpen your skills or stay current. Many long time corporate employees have found themselves out of work and obsolete in the market because of this thinking. Contractors on the other hand usually keep up with their skills and stay current with the market because they know their current gig will end soon.

If you assumed that your current job would end within a year what would you do different? Would you make learning new skills a priority? Would you handle your finances differently?

Your Business Plan Sucks!

Whether consciously or unconsciously you have been sold on a life/business plan all along. You have been getting subliminal messages the whole time and you might not have even noticed. My friend, you were giving a life/business plan and it sucks!

Don't believe me? If you are like the vast majority then you subscribe to the following life/business plan:

1. Get a job and start working as soon as you graduate college (or high school)
2. Keep working every day of life (except for two to three weeks vacation) until you are 65/67.5 years old or until you die, whichever comes first.
3. Once you reach that magical age you "retire" and finally start enjoying life

Sound familiar? It should because that's what your plan is and that's how you live your life and manage your finances. If you're like the vast majority every major financial decision is based on that life plan and the thought process goes something like this:

Can I afford it? That is, if I break this purchase into monthly payments and add it to all my other monthly bills will my salary be able to cover it? After all, I'll be working everyday of my life until I'm 65/67.5 so why not treat myself. I "deserve it".

Have you ever even considered the possibility of not working? We live our lives assuming we are a perpetual cash flow producing machine. That's why we redline our finances to the max because there will always be another check next month.

Try this plan on for change: "I will only continue to work for the next five years and I plan to live well beyond that". Will this assumption change any of your financial decisions? Will it cause you to reconsider your career decisions? If you were only allowed to work for the next five years what would you do?

I know it sounds crazy that you could just stop working after five more years. That's because you bought into the perpetual work life plan a long time ago. You cannot yet conceive it but consider that it can be done for a moment. Entertain the idea in your head that you will only allow yourself to work for another five more years and after that the cash flow somehow will still keep going. Now sit back and relax and pay attention to the ideas that will start coming up in your head as to how this would be possible.

I will go more in depth on this subject in further posts but for now just let your subconcious bounce around that idea for a while. Consider the possibility and let your mind freely explore how you could pull this off.

The Map for Success

Tony Robbins introduced me to the concept of modeling. If there is something you want to achieve then find someone else who has already achieved it and model after him/her. Modeling will shortcut your learning curve and give you a template for how to achieve a particular goal. Modeling provides you a map to follow. The map will show you how to get from point A to point B in the shortest time, shortest distance, etc. Without a map you’d would have to experiment and through trial and error you would eventually get to your destination.

If you were to land in a city new to you a map would be very helpful. A map of the wrong city would be disastrous however. If you land in New York city and you’re reading a map from Detroit then no matter how fast you drive you’ll probably never get to your destination.

We all have a magical destination of where we’d like to be in terms of wealth, career, finances, etc. We’ll call this destination Disneyland. If you want to go to Disneyland you need to find someone with a map to Disneyland. Someone who’s never been to Disneyland would probably not have the map and give you wrong directions. It would be pointless to ask someone who’s never been to Disneyland to give you directions to it.

As obvious as this appears to be we seem to do it wrong all the time. Who do you get your personal finance guidance from? Your brother? your uncle? your coworkers? Well let me ask you, is your brother, uncle, or coworker in Disneyland? Are they in the financial nirvana you would like to achieve or are they as broke as you are?

I see it all the time. “My brother/uncle/coworker told me real estate is going up/going down/going sideways”. “He/she said it is a good/bad/terrible time to invest in real estate”. Yet if you ask your “expert” advisers you will probably find they’ve never done any real estate investment.

I know I know, you’re smarter than that. You get your financial advice from Money magazine, Yahoo, etc. I mean Money magazine surely has expert tips on how to get wealthy right? Let me ask you again, are the reporters/writers of those magazines in the financial nirvana you would like to be in? Are they wealthy? Or are they just in the rat race like you? Do you know people that follow their advice and are they in Disneyland or well on their way there?

Choose your mentors wisely. If you want to go to Disneyland find someone who’s been there and ask them for the map. It is only when you have the right map that you can truly make progress towards your goal of getting to point B.

Redlining your Home Finances

Have you ever revved up your car in first gear (or 1 on automatic) until the rpm gauge went all the way to the red? It was fun wasn't it? You probably experienced great acceleration and the thrill of the engine noise, even though you weren't really going that fast. Revving your car all the way to the red produces tremendous acceleration and it is at that point that your engine produces its maximum horsepower. However, you can't hold that for long because the engine will wear out and it will overheat or blow up.

Well I bet that you're probably doing the same thing to your finances. If we call your take home pay 100% then your financial gauge is probably all the way in the red at 90, 95 or even 105%! If you were saving 50 to 60% of your take home pay then your financial gauge would be running at a nice and sustainable 40 to 50%. But you're not aren't you?

My friend you are probably overheating your financial engine. When you were single you had one income and you managed fine. Then you got a married and became DINKs (dual income no kids). Your financial engine got about twice its horsepower over night. However, within a few months you revved your lifestyle from 50% to probably 80%. Then came the kids and now you really put the pedal to the metal at 90+. The last time you got a raise you just stepped on the accelerator to maintain your neckbreaking 90+% pace.

If you save 50% of your income every year or even 15% you would have no choice but to be wealthy. Lets assume on average you make $60,000 a year and you save 15% or $9,000 a year, $750 a month. In 10 years you should have at least $90,000 in the bank. Actually with compound interest assuming a 10% return you should really have close to $154,000. Did you do it? Do you have it? I don't want to give you the 20 years figure because I'll depress you.

You'll come up with a thousand excuses of why your situation is different and why you have no choice. Think again. It took you many years to get up to your current lifestyle speed so don't expect to brake on a dime. However you can slow down considerably and not notice much of a difference. That 3,000 sq. ft. house might seem like a necesity but many families manage to get by on 1,200 sq. ft.. Some families with two kids can actually fit inside of a Toyota Corolla so don't think that huge $40,000 SUV in your driveway is a necessity either.

If you have saved at least 15% and your rate of return is at least 10% annually congratulations, you are the very small minority. The rest of us have been driving an overheated financial car.

Don't pay off your house

This is somewhat of a controversial statement and it is not for everyone but bear with me and I'll explain to you why.

Your home is probably your biggest source of equity. When you bought your home you probably put down 5, 10 or even 20% down. If it has been a few years since you bought it then appreciation has probably given you free additional equity. Furthermore If you have been diligent you have been sending extra payments to principal to pay if off sooner, very commendable. These three forces combined have probably pushed your loan balance to value to less than 60% (Ratio of what you owe vs. what the home is worth).

Intuitively you might think that the more you lower your loan balance, the more you contribute to principal and the more equity you have in your home the safer you will be financially. However, you would be wrong. The more equity you have in your home the more at risk you are financially.

How could this be? Shouldn't paying off your home be one of the most financially sound and rewarding goals you should have? Well yes and no. Very few people have the financial fortitude to pay off their house. If you can pull it off and you want to get rid of that mortgage you should but not the way you're doing it.

Let us examine the risk with an easy mathematical example. Let's say you purchased a house for $100,000 and you put 5% down or $5,000 so your loan balanace starts out at $95,000. After five years the house has appreciated and it is now valued at $135,000. Also assume that you diligently sent extra payments and your loan balance is now $80,000. At this point your equity is $135,000 - $80,000 = $55,000. Are you safer now than when you just bought it and you only had $5,000 in equity? I don't think so.

What you have in the $55,000 equity scenario is your capital at risk. At risk of what? Life events come to you unexpectedly and you might find yourself one day without a job or without means of generating income for a while. If you call the bank and say "Hey I've been making exta payments to the loan so could you apply that extra money to the next six months of payments because I'm in a bind?" they'll promptly and vehemently deny your request. Furthermore the bank will have a big incentive to foreclose on you because of the equity. If you had to negotiate payment terms with the bank which position would you rather be in: a) with $55,000 in equity or b) with $5,000 in equity? The bank is more likely to negotiate with you in position (b) because they stand to lose a lot money if they foreclose. If the bank forecloses on you in position (a) they'll come out ahead.

Here's a better alternative. Instead of sending extra payments to the bank save that extra money, build an emergency fund and invest it. If you ever have trouble making the payments then you can tap into your emergency fund and save your house and your hard earned equity. If you already have a lot of equity in your house you should refinance and pull out all the equity you can. Then you can take that extra cash out and create your own emergency fund. If you keep growing your emergency fund to the point of exceeding your loan balance then you can pay off your mortgage in one lump sum. Isn't this a better and safer alternative?

Hopefully I have convinced you that having equity in your home is actually a very risky proposition. Taking your equity out and investing it instead of spending it requires discipline but it is well worth the effort. Look for part II of this article to learn an even better reason to not have large equity in your house.