June 23, 2014
Money Talks: Mortgages and Monster Trucks
I learned a hard lesson in my younger-youth (I'm still young-ish!) that was reinforced by our recent house sale: magically making money isn't going to happen for me. In my early teens I invested $5000 with Investor's Group (and my parents' help). Since my birth, my grandmother had put aside $25 a month for me, and the plan was to double my money by the time I ventured off to law school. Instead, I was hit by the Enron bankruptcy (and just a slew of other bad luck, despite a pretty diversified portfolio). For nearly a decade I lost money. In my mid-twenties I finally gave up, sold my stocks, and walked away with only $3000. It was crushing, especially because my grandmother had worked so hard to gift me that money and I felt like I had squandered it. (I should have invested in Pyrex, the prices have exploded...)
When Handy Hubby and I bought the townhouse I hoped that when we eventually sold it, we would see the windfall of profits for which I'd been patiently waiting.
When we sold the townhouse, we broke even. We got back every cent we put into it, even the real estate agents' fees, but we didn't make any money. We did, however, walk away from the sale with a mittful of cash - enough to pay for the down payment on the lakehouse, enough to replenish our depleted savings accounts (carrying two mortgages proved more draining than we imagined), and also enough to gleefully skip over to a car dealership and buy a brand new Ram 2500 Truck.
"Pay For a Brand New Car with Cash," had been on my bucket list since before I could drive (I was a weird kid). It was truly exciting to pay for our truck with cash, although it was a lot less exciting than I had dreamed. I always envisioned a burlap sack with a $ painted on the side, and me dramatically - no, triumphantly - counting out bills. In reality we paid using a cashier's cheque, but it still felt like a major win to own our truck outright as soon as we drove it off the lot.
As we pulled away from the dealership, we grinned at each other. Neither the stock market nor the housing market had been kind to us. But we had built up equity in our house and made magic happen. WE did that, and it felt good.
Our biggest "secret"? We over-paid our mortgage.
We started off small. We were very nervous about jumping from renting to owning and opted for a longer amortization to decrease our monthly payments. As soon as we were settled into a routine and knew our limits, we added a small amount to each of our payments. We kept increasing our payments, any chance we got. When we finally finished paying off student debt, we started putting a good chunk of that amount toward the mortgage every month. When we finished paying off our car loan, we added even more money. By last year, we had doubled our monthly payment. All of that extra money went straight to the principal, which saved us a lot of interest. When we bought the townhouse we had a schedule of 35 years to pay it off (yikes!), but after only four years of over-paying, we'd whittled the number of years left to 7!
Now we're turning our attention to our new mortgage, eager to reduce that beast too. Some banks do whatever it takes to keep you paying a mortgage, longer, by offering things like low monthly payments (with lengthy amortization periods), low down payment options, "payment holidays". Our own mortgage lender discouraged us from paying extra on our mortgage. A good financial expert can help determine the right course of action because paying off a debt isn't the only secret to financial health, and in some cases it might be wiser to invest or save extra money. I hesitate writing these Money Talks posts because I'm no financial expert (obviously), but I think there's value in laypeople chatting about what has worked (or not worked) for them. Plus, now that I'm 30, aren't I inching toward the age when it's appropriate - nay, expected - to dole out advice to young whipper snappers?
Here are a few more thoughts on saving money on a mortgage - as well as some reasons why there is no one-size-fits-all advice.
There's value in a large down payment. In Canada Mortgage Default Insurance (CMHC Insurance) applies to a mortgage with a down payment between 5%-19.99%. It's good and bad: it means people can buy a house with a smaller down payment than used to be required and mortgage rates overall are (supposedly) lower, but it also means that folks with a down payment of less than 20% incur a fee (around 2-3% of the purchase price). It's difficult to determine the "right" course of action when it comes to down payments. Sometimes even if a person/couple has the 20% required, they might want to use it for renovations/emergency savings so it could be smarter to just accept the fee and not need to rely on credit cards or a personal line of credit for updates or emergencies that arise. Also, it might be worth it to incur the fee rather than continue to rent. Each person's situation is different, but to save money on a mortgage, the larger the down payment the smaller the amount of interest charged - plus the CMHC fee can be avoided.
A weekly or bi-weekly payment can help. We've always liked a weekly or bi-weekly payment plan to help nudge thing along. I'm not promoting RBC bank, but I found a great chart on their website that illustrates the savings with different payment options (ranging from monthly to accelerated weekly). A mortgage lender can help figure out the exact savings for you.
Mo money, less interest. A mortgage is one of those problems you can throw money at. For us, adding more money to our mortgage payment helped reduce a mortgage because all that "extra" money went to the principle. Any amount helps and can really add up. Again, I don't want to promote a particular lender but this calculator demonstrates the savings generated by even a small additional payment to a mortgage. Lump sum payments are a good approach too (see you, income tax return!). Unfortunately, lenders typically cap the amount of extra money that can be put toward a mortgage annually.
Of course the egghead suggests reading. In my humble opinion, I think that individuals need to be informed, in general. No institution is perfect and we can't rely on professionals exclusively. For example, there are excellent interior designers out there but even folks who hire one flip through a decor magazine to get an idea of what they'd like. Cancer patients often read up on the latest courses of treatment so they're informed when meet with their doctors. I think we need to approach finances the same way. Having said that, a lot of jibber-jabber about finances is really difficult to comprehend. I may or may not have a low-risk investment in "The Utilities," a decision based solely on how profitable it is to own the utilities in Monopoly. I do my best to muddle through. Gail Vaz Oxlade is really good at making it all seem so simple.
One day I might work up the courage to try higher-risk investing or, better yet, maybe I'll get my windfall after all (that's why we buy lotto tickets!), but ultimately Hubby and I know that we need to work hard for future financial security - there's no easy answer. All I know for certain is that if we continue to chip away at our mortgage, the next time we sell our house I'm buying my dream car...vroom vroom.
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