Category Archives: Mortgages

Paying Off Your Mortgage Is Like Having A Second Job Income Without Working

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Last year I wrote the piece called: Paying Off Your Mortgage is Like Working a Second Job, but I think I confused some folks so I thought I’d try to explain it more thoroughly this time around.  I’m going to show off my geeky spreadsheet side which is very much a part of most of my financial calculations.

Below I’ve included some quick spreadsheet calculation:

Working a 2nd Job
weeks 52
hr/week 40
pay rate 7.50
15,600
Money Not Spend on a Mortgage
month 1,300
months/yr 12
15,600

In the spreadsheet above, I paid off my previous  $15,600 a year mortgage!  That’s works out to be $1,300 extra dollars a month that’s available for me to invest, spend, burn, whatever…  So if you look at my calculations for working full time at $7.50 per hours, it seems to be equivalent, but it’s not…  The thing is that the money from the working full-time at $7.50 is before tax is taken out versus my mortgage saving (which was paid with after tax money, which is commonly called discretionary income).

Small House

Cousin’s Dream House

So based on my own personal scenario, I’m really averaging the equivalent of working a second job at $10.50/hr (see calculation below), but obviously without working…  While this isn’t obvious at first, if you consider all of the various forms of taxes taken out of your paycheck, it makes sense.   So the calculations below is based on the number that I would have to make (gross income) to have an equal amount of discretionary income.

After Tax Calculation
Working a 2nd Job
weeks 52
hr/week 40
pay rate 10.50
21840
Money Not Spend on a Mortgage
month 1300
months/yr 12
15600
6240 40% Taxes
21840

I think some people think that once the house payment goes away, the previous mortgage owner is now only breaking even, but what really happens is the previous loan payment flips to the positive side by an equal amount that was being spend on interest and principle (all my numbers above doesn’t include my real estate tax and insurance payment since the don’t affect my calculations).

So after I paid off the house, I went from paying $15,600 on the mortgage to investing, saving and a little bit more spending of the extra $15,600!  There is no subtle transition, the jump to positive side was  immediate!

Anyway, I thought that it would be worth analyzing a bit further than I did late time.  Please leave any questions in the comments below!

Tell me if you realized all that I mentioned above,

Thanks,

MR

Choosing Your Fixed Mortgage, 15 vs 30 Year

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Eleven years ago, before my son was born, my wife and I were shopping for a house.

The common advice of the day was to buy a house that you could barely afford, because you would get increasing pay raises every year that would make the house payment cheaper as time folds.

Another piece of advice was to not make extra payments on your house, but instead invest that money in the stock market.  While I don’t entirely disagree with that advice, I have to say the stock market route didn’t pan out for most of us!

Even though I respected the friends giving the advice above, I ignored both of these paths because they weren’t the best paths for me.

Since I hate debt, I couldn’t justifying buying a house that would cost me more than three times my salary.  Once I had the mortgage, I tried to pay it off as quickly as possible, using self-defined milestones that would make paying back debt if not an enjoyable experience, at least a bearable experience.

Why 30 Year Instead of 15 Year Mortgage

Now since I already stated that I’m not a fan of debt, you would think that I purchased a 15 year mortgage, but I didn’t.  At the time the interest rates were high enough that I had to go with a 30 year mortgage because of the smaller monthly payment.  Another factor in the equation is that my wife planned on being a SAHM someday. Since we knew that my wife’s salary wouldn’t be coming in as an income stream, we needed to get the most house for my salary without creating a hardship for us financially.  Unfortunately, at that time, that meant getting a 30 year mortgage.

So I took out a 30 year mortgage, how did I pay my house off in 10 years?

Well, for the first year, while my wife was still working, we doubled down our payments on the monthly payment, putting the entire extra payment towards principal.  The after that I continued to put and extra 50% towards the payment until it was paid off.  During a period when finances temporarily got difficult, I only put $100 dollars extra towards the principal.  Later, I made up the extra payments by using the money back from our taxes.  But having such flexibility might not have been the case if we had the larger 15 year mortgage monthly payment.

About six years into paying off the mortgage, I was able to refinance (for free through Well Fargo) and at that time I was able to choose a 15 year mortgage since both the interest rate were down and my payment would have been $200 less than the current payment at the time.

So in conclusion, you have to decide what works best for you and make sure you have some wiggle room.  Life and job employment are linear, and having a bit of an extra cushion can really come in handy during crunch periods.

Bests,

MR

Mortgage Free versus Paying For 30 Years

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Today I’m going to talk about why I believe paying off your home mortgage early makes more sense for us middle folks (and probably the upper folks too) instead of investing all of your extra money into the stock market.

From some financial advisors, we hear advise such as paying off your mortgage is a bad financial decision if not down right stupid.

But unless you are a robot, I don’t believe this is true!

Let’s looks at the argument for not paying off your house early.  The typical argument goes that if you take the extra amount that you would pay on your house and invest it, you’ll end up rich some day!

The problem with that argument for the majority of us is twofold:

  1. That extra money that you were (in theory) to invest somehow gets spent  in a moment of weakness or financial strain during your life. 
  2. The standard deduction is so high that sooner rather than later the itemized deduction for a mortgage is not worth it after 5 or so years (Unless you have a $300,000+ house)

Another problem is what if the market tanks like it did in 2008?  Investment returns aren’t guaranteed, but the lack of a house payment is forever (at least until you upgrade to a larger house…)!

Financial strain happens, and that is why it’s wise to have an emergency fund during this process.  While I didn’t have a dedicated emergency fund per se, I had money in diversified portfolio (including fixed income) that I could hit if such a need came to surface.

Since I am mortgage free, and no longer have a mortgage, saving is much easier for me now (after a period of adjustment).

-MR

Paying Off Your Mortgage is Like Working at a Second Job

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Cash in Hand

House Working Part-Time?

Paying off your mortgage is like working at a second job!

By paying off my mortgage early, I get to keep an additional $15,000 a year!

Let’s say that you decide that your first job wasn’t enough money, or that you want to dig yourself out of debt.  If you were to get a part time job working 20 hours a week at a wage rate of $14.42 all year round, using straight simple math, that would be the pay rate that it would equal to have $15,000.

But that’s not entirely true, actually you would have to work 20 hour at a pay rate of $18.03 (assuming your in the 25% marginal tax rate).  The reasons for the higher pay rate is that the money that you would pay your mortgage with would be after tax money.  Even that number is low since I didn’t take out FICA, insurance, state tax, etc!

This year, I’ve really noticed that my checking account balance is growing quickly!  I’ve transferred money from my checking account into my online brokerage account every so many months.  It’s been great!

Some may say “but what about the itemized mortgage interest deduction and the fact that you cannot deduct the interest on mortgages” .  Well, I’m going to tell you a secret…  after you get your mortgage payments low enough after a few years, the standard deduction is so high that those itemized deductions really don’t matter!  For my family, it didn’t take long to hit the break even point between the standard deduction and itemizing things.  Since we were prepaying, we met this crossover threshold after about 5 years.

The extra money has come in handy for us, making it easier to afford sports and other activities for our kids.  We are also planning larger vacation, perhaps even overseas soon.

The beauty of that extra $1,250 each month is that I can invest most of that money so that it even grow more quickly!

Do you share my viewpoint that not paying $1,250 extra a month would be equivalent of getting a part-time job working 20 hours a week?  Of course, if for some reasons my primary job was lost, so would my pseudo part-time job too.

-MR

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