Should You Pay Off the House?

by Lisa Gibbs, Money Magazine
Saturday, February 26, 2011
original article here

The issue is that most people only keep their home for 7 years and of course the banks know this. That’s why they will charge all of your interest up front in the first few years. So image in the case of a $200,000 thirty year mortgage that you’ve been paying off for the last 20 years, up to this point you will still owe approx $108,000.

So the question is how do we pay off our mortgage early then ?

One of the most common ways is to increase your monthly payments. For example, If you had a $ 1,200 monthly mortgage payment and that was at a 30 year fixed , if you could possibly add another $100.00 a month to your payments ,

When there was easy money to be made in real estate and stocks, mortgage debt seemed like nothing to fear. Now an increasing number of homeowners are wondering if it makes sense to hasten the day they can say goodbye to a big monthly expense while earning the equivalent of a decent, guaranteed return.

"I'm hearing this question more now that clients aren't feeling as comfortable about the market," says Los Angeles area financial planner Eileen Freiburger.

Maybe you're part of a young family, and whittling down your loan balance seems like a sound strategy. Or maybe you're counting down to retirement (perhaps even already kicking back), have only a few years of payments left, and are wondering if you should just knock off the balance.

But if you're thinking of such a move, you're also well aware that mortgage interest is tax-deductible -- and if history is any guide, putting money into stocks will earn you a higher return over the long haul than putting it into real estate.

The answers to the questions below can help you determine your best course of action.

Do you have more pressing financial needs?

Anyone who has credit card debt or isn't maxing out her 401(k) should make those the priority. You should also have at least six months' worth of living expenses in cash.

A few years ago you would have been able to pull money out of your home quickly if, say, you lost your job. Now that lenders have tightened up, that's not so easy.

Retirees and near-retirees contemplating a lump-sum payoff need to ensure they have enough liquid savings to handle emergencies such as unexpected medical expenses, especially because it's hard to tap equity on homes without first mortgages.

And you shouldn't pull money out of your IRA to pay off your home loan, since the IRA funds will be taxed at ordinary income rates.

How long do you plan to stay?

If you plan to trade up to a larger home or downsize to a smaller one within five years, it doesn't make sense to put extra money into your mortgage. The real estate market may be shaky for a while longer, and "you don't want to tie up your cash in your home and then not be able to sell," says La Jolla, Calif., financial planner Christopher Van Slyke.

What do you really gain from the interest tax deduction?

Assuming you itemize your deductions, you can find out what you save by multiplying the mortgage interest you paid last year by your tax rate (federal plus state). A couple in the 28% tax bracket, with a $200,000 loan at 5%, for example, will save $2,781 in taxes the first year of a loan.

Your tax savings decline the further you get into the loan, as more money is applied toward principal.

For many retirees and near-retirees close to the end of the mortgage, the interest deduction is not a reason to avoid paying off the loan, especially since retirees often end up in a lower tax bracket, says planner Peter Canniff of Nashua, N.H.

How would you otherwise invest the money?

Put your money into stocks and bonds and you're likely to get a higher return over the long run than you would paying off your home loan, given today's low rates.

If you itemize, you can calculate your effective return by multiplying your mortgage rate and your tax rate, then subtracting the answer from your mortgage rate (you can do this with the mortgage tax-deduction calculator at bankrate.com/calculators.aspx).

So for someone in the 28% tax bracket with a 5% mortgage, the effective rate of return on paying off the mortgage is 3.6%. By comparison, a 50/50 stock/bond portfolio has historically earned 8.2% long term, though it's sensible to expect future returns to be a more modest 6%.

Still, if you're very skittish about the market or are a retiree keeping a big chunk of money in low-earning CDs, you might do better by losing the loan, given that the average five-year CD is paying just 1.6%.

"For retirees, it's hard to beat the guaranteed return," says Anthony Webb, an economist at Boston College's Center for Retirement Research.

Will being debt-free help you sleep better?

In that case, you might be willing to forgo the extra return you could earn in the market. "Less stress, less worry," says Orlando-area planner Brian Fricke. "Sometimes that matters more than the math."

Four Traditional Money Rules to Break

Who would have thought??? Read article below and see what you think....

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Original article found here

AnnaMaria Andriotis
Saturday, February 19, 2011

Never borrow against a 401(k). Avoid credit cards. Make a bigger down payment on your home or apartment to avoid paying extra mortgage interest. These are among the tried-and-true financial rules consumers have been told to live by for years. But now -- with interest rates still low and credit staging a comeback -- might be a good time to break them.

This solid financial advice isn't suddenly all wrong, but many of these axioms no longer result in higher savings or less debt. That's because the economic recovery has opened up more exceptions and loopholes to standard advice, says David Peterson, president of Peak Capital Investment Services, a financial planning firm. Advisers, for example, typically discouraged clients from taking a loan from their 401(k) -- but this is now the cheapest way to borrow money, with the average rate at 4.25%, lower than most personal loans, to pay back debt they racked up during the recession. But as some parts of the economy have improved -- equities are once again outperforming fixed income, banks are slowly returning to lending, and consumers are spending more -- the rules for making and saving money are changing, at least temporarily.

Here are four traditional money rules you can break -- at least for now.

401(k) Loans

Old school advice: Avoid taking one at all costs.
Now: The most affordable loan available.

For decades, borrowing from a 401(k) plan was synonymous to derailing retirement savings. But right now, the cheapest bank for many borrowers -- especially those who feel secure in their job -- is their own 401(k). Average interest rates on credit cards are 14% and on home equity lines of credit 5.22%. But a 401(k) loan charges a fixed average of prime (currently 3.25%) plus 1%, according to the Profit Sharing/401(k) Council of America. Approximately 90% of employers offering 401(k)s permit employees to borrow from them, according to the PSCA, and the loans can last for up to 15 years. These loans make most sense for consumers stuck with high-interest credit card debt. In a year, a borrower can save around $800 in interest with a loan that eliminates a $5,000 balance on a card with a 20% interest rate.

And the money the borrower pays back goes into their 401(k) -- not to a bank. Repaying can also be easier than it is with a regular loan, says Olivia Mitchell, professor at the University of Pennsylvania Wharton School, who recently coauthored a study on 401(k) loans. About 60 million people contribute to a 401(k), according to the PSCA; once a loan is taken out, any contributions made via automatic payroll deductions first go toward paying down the loan. But, there are still some pitfalls: If you lose your job or leave it voluntarily and can't pay the loan back within 90 days you'll be hit with federal income tax on the outstanding amount, plus a 10% penalty if less than age 59 1/2. And you'll need to reallocate some of what remains into higher-yielding equities until the account is made whole, to avoid missing out on potential gains, says David Wray, president of the PSCA.

Roth IRAs

Old school advice: Convert a traditional IRA into a Roth to save on taxes.
Now: Stick with the IRA.

The Roth IRA's appeal has always been that contributions, rather than withdrawals, are taxed, shifting the tax burden to pre-retirement instead of years down the road when taxes could be higher. Roth IRAs became even more user-friendly last year when taxpayers were allowed to convert from a traditional IRA regardless of income (the limit for conversions had been $100,000 modified adjusted-growth income). But in many cases, staying put in a traditional IRA will lead to bigger savings -- especially for people five to 10 years away from when they plan to withdraw their money, says Peterson. Here's why: It can take years of tax-free growth to make up the taxes incurred during the conversion. For example, someone who converts $100,000 from a traditional to a Roth IRA and pays $30,000 in taxes will need at least five years to make that money back -- assuming a 7% rate of return. And that doesn't address the loss of compounding that would have occurred if that money didn't go toward paying taxes, says Sheryl Garrett, a fee-only certified financial planner.

There's also less time to pay taxes on this conversion now. Savers who converted from a traditional IRA to a Roth IRA last year were able to spread the income from that conversion over 2011 and 2012. But now, all of the income from a conversion made in 2011 (and after) is taxable at once. Also, this conversion comes with the risk of getting bumped to a higher tax bracket during that year because the money counts as income -- so converting might not make sense for someone whose budget is currently stretched thin. Instead, savers might now want to convert a smaller amount gradually once a year that won't put them into different bracket, says Garrett.

Mortgages

Old school advice: Choose the mortgage with the smallest interest payments.
Now: Go with more interest.

Paying the least interest on a mortgage requires two steps: a down payment of at least 20% and paying down the loan quickly. But both strategies can create a setback for a borrower -- especially in still-uncertain housing and employment markets, says Chip Cummings, president of Northwind Financial, a training and consulting company for mortgage firms. With interest rates still low, instead of throwing most of their money into the home -- where some of it could be lost if home values decline -- consumers might want to make a down payment of 10%. Keep the extra cash in an emergency fund in case of sudden job loss or unexpected renovations and take on the added cost of private mortgage insurance.

PMI varies, but on average is 60 basis points. On a $300,000 30-year mortgage, a borrower keeps an extra $30,000 in cash and pays $1,800 a year just in PMI until he or she hits the 22% equity threshold. What's more, a 30-year mortgage, rather than a 15-year one, is one good way to build a savings safety net, says Keith Gumbinger, vice president at HSH Associates, which tracks the mortgage market. On average, monthly payments are 20% to 30% smaller with a 30-year mortgage, he says. That extra money could be stashed in savings for a rainy day or to pay the mortgage if you lose your job.

Credit Cards

Old school advice: Refrain from using them.
Now: Swipe -- with caution.

Stashing credit cards in a bank safe deposit box or freezing them in a block of ice were commonplace for many consumers during the recession in an attempt to lower spending and take time to pay down cards. But now, it seems that in order to hold onto a good credit score and access to credit cards in case of an emergency, borrowers need to make more purchases using them. Prime borrowers who stop using their credit cards will find their credit lines slashed or closed -- largely because their accounts are unprofitable since there's no balance to charge interest on, says John Ulzheimer, president of consumer education for SmartCredit.com, a credit-monitoring web site.

The median FICO score of borrowers with no trigger event, like a missed payment, who've been affected, is 770, according to a 2010 study by Fair Isaac. The result is a higher amount of credit card debt compared to total credit limits available, a ratio that can contribute to about 30% of their credit score. Use your credit cards at least once every three months -- and pay the balance off in full each time -- to avoid this, says Ulzheimer.

MAKE ONE EXTRA MORTGAGE PAYMENT THIS YEAR

Part of original article found here

Okay, this one sounds a bit unrealistic, especially to those hard working Americans who are having serious trouble just making their regular payments, much less tacking on one more. But hear me out. The average mortgage payment can run about $1800/month. If you want to save that amount over the course of the year, that’s $5/day, or $35/week. Take ten minutes on the phone with your bank, and create an account in which they automatically deposit $35 of your pay into it every week. By the end of the year, you’ve got the $1800 you need to pound down one extra mortgage payment. Sure, you could withdraw it and blow it on overpriced holiday gifts or a fun weekend in Atlantic City, but then I’d have to hunt you down and completely flip out. Don’t create that kind of work for me, I beg of you. The way interest and principal are calculated on a home loan, paying down one extra mortgage payment every year will save you TENS of thousands over the course of the loan (easily double that extra amount you put in) and shorten that loan time from 30 years down to easily 24 instead. By any account, that’s an investment that will pay off huge.

Quotes of the Day

We can all learn something from the innocence of children!


'Be kinder than necessary because everyone you meet is fighting some kind of battle.'

A sharp tongue can cut your own throat.



If you want your dreams to come true, you mustn't oversleep.



Of all the things you wear, your expression is the most important.



The best vitamin for making friends...... B1.

The happiness of your life depends on the quality of your thoughts.



the heaviest thing you can carry is a grudge..

One thing you can give and still keep...is your word.





You lie the loudest when you lie to yourself.

If you lack the courage to start, you have already finished.

One thing you can't recycle is wasted time.



Ideas won't work unless ' You' do.



Your mind is like a parachute...it functions only when open.



The 10 commandments are not a multiple choice.


The pursuit of happiness is the chase of a lifetime!

It is never too late to become what you might have been.



Life is too short to wake up with regrets.. So love
the people who treat you right.. Forget about the
ones who don't. Believe everything happens for a reason.
If you get a second chance, grab it with both hands. If
it changes your life, let it. Nobody said life
would be easy, they just promised it would be
worth it.


Friends are like balloons;
once you let them go, you might not get them
back. Sometimes we get so busy with our own
lives and problems that we may not even notice
that we've let them fly away. Sometimes we are so
caught up in who's right and who's wrong that we
forget what's right and wrong.. Sometimes we just
don't realize what real friendship means until it
is too late. I don't want to let that happen so
I'm going to tie you to my heart so I never lose
you.

HANDBOOK 2011

Health:
1. Drink plenty of water.
2. Eat breakfast like a king, lunch like a prince and dinner like a beggar.
3. Eat more foods that grow on trees and plants and eat less food that is manufactured in plants.
4. Live with the 3 E's -- Energy, Enthusiasm and Empathy.
5. Make time to pray.
6. Play more games.
7. Read more books than you did in 2010.
8. Sit in silence for at least 10 minutes each day.
9. Sleep for 7 hours.
10. Take a 10-30 minutes walk daily. And while you walk, smile.

Personality:
11. Don't compare your life to others. You have no idea what their journey is all about.
12. Don't have negative thoughts or things you cannot control. Instead invest your energy in the positive present moment.
13. Don't over do. Keep your limits.
14. Don't take yourself so seriously. No one else does.
15. Don't waste your precious energy on gossip.
16. Dream more while you are awake.
17. Envy is a waste of time. You already have all you need.
18. Forget issues of the past. Don't remind your partner with His/her mistakes of the past. That will ruin your present happiness.
19. Life is too short to waste time hating anyone. Don't hate others.
20. Make peace with your past so it won't spoil the present.
21. No one is in charge of your happiness except you.
22. Realize that life is a school and you are here to learn. Problems are simply part of the curriculum that appear and fade away like algebra class but the lessons you learn will last a lifetime.
23. Smile and laugh more.
24. You don't have to win every argument. Agree to disagree...

Society:
25. Call your family often.
26. Each day give something good to others.
27. Forgive everyone for everything.
28. Spend time with/people over the age of 70 & under the age of 6.
29. Try to make at least three people smile each day.
30. What other people think of you is none of your business.
31. Your job won't take care of you when you are sick. Your friends will. Stay in touch.

Life:
32. Do the right thing!
33. Get rid of anything that isn't useful, beautiful or joyful.
34. GOD heals everything.
35. However good or bad a situation is, it will change.
36. No matter how you feel, get up, dress up and show up.
37. The best is yet to come.
38. When you awake alive in the morning, thank GOD for it.
39. Your Inner most is always happy. So, be happy.

Eight Steps to Financial Health

Laura Rowley Money & Happiness

Posted on Sunday, October 31, 2010, 12:00AM

Like many Americans, Leah West, 40, is struggling to shed debt and manage an array of financial obligations. After her divorce seven years ago, Leah, a mother of three, enrolled in college and earned her bachelor's and master's degrees. She moved up the ladder in health care administration, and earns about $80,000. But she's now saddled with more than $82,000 in debt, mostly student loans; and her home is worth less than what she paid it. Leah also wants to set aside money for college tuition for her kids, and build a retirement fund.

Since September, I've been coaching Leah in her quest to improve her finances, a journey she blogs about at WomansDay.com. Her story offers practical lessons in how to attack multiple financial goals and maintain momentum. Here are just a few:

1) Focus on the positive

Before you confront a mountain of bills, remind yourself what's working for you. Leah had earned a master's degree — an accomplishment just 6 percent of Americans can claim. She enjoys her job, has a solid income and excellent insurance coverage. She is in good health, has three wonderful kids, and can cover all her bills without falling further into the red. Relationships, education, career experience, health and spirituality are all components of well-being; savoring the positive can provide the momentum to tackle the bad stuff.

2) Set one to three manageable goals

Don't overwhelm yourself with a list of ten things to fix immediately. Leah's priorities were eliminating her credit card debt; creating a plan to pay off her student loans (which were in forbearance); and building up an emergency fund of $10,000. Once we had a strategy up and running, we could move on to other goals, such as college savings and retirement.

3) Get a handle on the real numbers

Although Leah was making double the minimum payment on her credit cards, she felt she wasn't making progress. I used an online debt calculator to show her the truth: By paying twice the minimum, she would banish the debt in 15 months and pay $302 in interest. If she made only the minimum payments, it would take more than six years, and she'd pay $1,328 in interest. Use tools like this one to help you get a grip on the math.

Leah also got the hard numbers on her student loan debt to make sure the loans weren't snowballing at absurdly high interest rates, and disrupting the rest of her financial plan. Fortunately, the rates were quite low, so we left that alone for the moment to focus on the debt paydown. (That would free up the cash necessary to eventually tackle the student debt.)

Finally, we discussed Leah's retirement plan. She had enrolled in a 403(b) plan when she started her job at a health center and contributed steadily for four years. But about 18 months ago, her employer eliminated matching funds because of budget cuts, so Leah stopped contributing. The health center is expected to reinstate the match next year, and Leah plans to jump back in then. It's a smart move from a numbers perspective: It's better to pay down credit card debt at 20 percent interest than to contribute to a plan with no match, because she's unlikely to earn a 20 percent return on her retirement savings.

4) Rank your rates, then cut them down

Leah listed her credit cards on a single page from highest to lowest interest rate, along with the amount due and the company contact information. She called each lender and asked for a rate reduction, using this script: "I have been a cardholder since ____. In the past few months, several credit card companies have offered me lower rates than my current rate with you. I value our relationship, but would like you to match the other offers that I have received and reduce my interest rate by 10 percent. Are you authorized to adjust my interest rate?" (If they say no, ask politely to speak to someone who can and repeat the request.)

Although it took several hours of phone hassles, Leah cut her interest rate by 13.5 percentage points across three cards. Savings: About $275.

5) Snowball it down

When we started, Leah had four months left on her car payment. Once that debt is paid off, she'll direct the money to the highest-interest credit card. Similarly, when that's paid off, the money will be targeted (with her car payment) to the next credit card until they're all completely paid off. Then that giant snowball of cash will be used to pay off her student loans. The key is to keep the money out of her daily budget, so she doesn't use it to boost her lifestyle.

6) Track spending to the penny

Leah began looking for ways to reduce her monthly expenses, and thinking about her choices in a value-oriented way. For instance, she could move from her home on Cape Cod to a cheaper suburb of Boston, but she values living on the beach. On the other hand, Leah realized she was dropping about $400 a month at a corner convenience store, on non-essentials like deli sandwiches and homemade ice cream. She's eliminated those indulgences, dropped a gym membership she barely used and found ways to save on her cable and auto insurance. The idea is to cut where she can so she can spend on what she values most. The only way to do that is to know where every penny goes.

7) Look at ways to increase your cash flow

Leah usually gets a tax refund in April of more than $1,000. She spoke with an accountant about changing her withholding at work to get more cash in each paycheck (and no refund in April, because that's giving Uncle Sam an interest-free loan for a year). The accountant ultimately advised against it for now, but she'll revisit the idea next year. More importantly, she increased her income by working freelance on her blog. Those extra paychecks are earmarked to pay off her debt and build an emergency fund of $10,000.

8) Keep a gratitude journal to stay motivated

Leah started a journal right after her divorce, when she was overwhelmed and frightened about the future. She returned to it recently when she hit a financial setback — her partner of more than two years moved out, and took all of the living room furniture with him. (She bought a few basic pieces so the kids wouldn't have to sit on the floor.) The journal reminded Leah of how far she's come, and helped her find the energy and patience to keep moving forward.

Original article found here