Debt Free John and Jamie

We have a problem, but it’s kind of a good problem to have.  I was offered a job.

The job is in another state, in an area of the country that I would really like to live in.  I have family there (but not too close), and I’ve always liked the area.  The pay is better; about a 15% increase in my hourly rate, and it would enable me to establish myself as a corporation instead of a W2 employee.  I’ll elaborate on that another time, the short version is that I work as a contractor, and get paid by staffing agencies instead of the actual company I end up working for.

So what’s the problem?  I would have to pack up all my stuff, get my house in order, and move my whole family to this other state, in less than a month.  I will put my house on the market, but I doubt anyone will want to buy it for the amount we owe.  The other option is to rent it, to at least cover some of the mortgage costs, but then I have to be concerned with tenants, and how they treat the house.  Another downside is that, as a contractor, I don’t get paid for relocation costs.  So whatever it takes to move me down there would be my own problem.

The upside?  I would be moving to an area with a substantially lower cost of living.  I can rent a 3 bedroom apartment for only slightly more than I’m paying for utilities in my current house.  Also, even if I have to sit on the house for a while until the market goes back up, once it does, I can get rid of my house and all the mortgage debt associated with it.  I can then purchase an equivalent house for much less money, or a substantially larger house for the same money.

It would be a big move, and I’m not sure we are in the right situation to do it.  We don’t have a lot of money in savings, although we are getting better, and there are other concerns with moving at this point in time.  I’ll talk about this in another post, but suffice to say that my wife isn’t going to be able to do much of the physical activity required for moving to another state.

I’ll let you know in a future post what we decide, but it’s kind of nice to have options, isn’t it?

We received a letter in the mail yesterday from our mortgage lender.  They were offering to switch us to a biweekly payment plan for our mortgage.  The gist of it is that we would make a payment every two weeks of roughly half the amount we were paying for our monthly mortgage payment.  This amount would be automatically deducted from our checking account, and the payment could be adjusted to coincide with the date my paycheck was deposited in our account.  The effect of this payment plan would be to completely pay off our mortgage about 7 years early, and to reduce the total amount of interest paid by around $100,000.  For the effort involved in administering this payment plan, our lender would be charging us $9 per month, or $4.15 per payment.

Is this a good deal?  Let’s use an example.  If your normal monthly mortgage payment is  $1,000, your biweekly payment would be $504.15.  In the course of a year, you’d pay $12,000 using the normal monthly plan, while you would pay $13,107.90 using the biweekly payment plan.  The $107.90 is what the fees work out to be, so you are paying an extra $1,000 per year to your mortgage, effectively one extra month’s payment per year.  I’m sure you’ve heard the statistic that making one extra payment per year will save you 7 years on your mortgage.  That’s basically what you’re doing here, plus paying a 10% fee on top of that payment to do it.

I think it would be easier to take that extra payment, divide it by 12 (which would come to $83.33 per month in the example above), and add that amount to your monthly payment.  If the idea of making smaller payments more often is attractive to you, check with your lender to see if they will accept partial payments, so you can pay half the amount twice per month.  Either of these approaches will save the fees they want to charge for the biweekly plan.

In our case, we are already paying at least the extra payment per year against our mortgage payment, so I think we will stay where we are.  The only benefit would be that the biweekly approach is more automated, which might be worth $108 per year for some people.  Also, I should note that in researching this, I found that many of these biweeekly plans charge much more than $9 per month, some as much as $30.  So read the fine print carefully before determining if this kind of plan is right for you.

P.S. If you want to see what the benefits of this type of payment plan can do for you, I found a calculator for it here at Bankrate.com.

I recently read a blog post that brought up the classic fable “The Tortoise and the Hare.” (I can’t remember where I was reading about it, so I linked to the Wikipedia entry on the fable.)

As we were all taught in school, the moral of the story is “slow and steady wins the race.” This is a valuable lesson, and it applies very well to the concept of personal finance and debt reduction. If you pay down your debts a little at a time, you will make slow but steady progress toward your goal of debt freedom.

This is stated as the moral of the fable, so that is most likely the message the author intended to convey. However, is there another lesson to be learned in this story?

What always struck me about “The Tortoise and the Hare” is that if the hare had chosen to use his speed early instead of taking a nap, he would have easily beaten the tortoise. In various versions of the fable I have read, either the hare delays starting the race in favor of a nap and breakfast, or he runs about halfway, then decides to stop and nap.

With either version, the secondary lesson that I take from this fable, beyond “slow and steady,” is twofold:

1. Try your best: No matter how confident (or overconfident) you are in your abilities, never put in less than your best effort. That task you consider a “slam dunk” rarely is.
2. Don’t procrastinate: Why do today what you can put off until tomorrow? Because tomorrow may be too late.

I know this is a sort of nontraditional take on this story, so I’m interested to hear if I’m way off, or if this makes sense to anyone but me?

This is frustrating us to no end! When we refinanced our mortgage to get our of our adjustable rate mortgage (and get rid of the second mortgage) our home was appraised at $330,000. So a mortgage of $310,500, while nearly 95% of the value of our home, was still within reason.

At the time, looking at Zillow.com shows a value of around our appraisal number. Today, however, the value is down to $297,000! That’s over $30,000 in equity, gone. As is indicated by the news, we’re not the only ones this is happening to, and since we already refinanced, maybe we are the “lucky” ones? Also, we probably haven’t reached the bottom of the devaluation. We are making our payments (plus extra), so we’re not in any real danger at the moment.

What bothers me at the moment is that we are making extra principle payments for two reasons:

• to reduce our Loan To Value (LTV) ratio to the point where we no longer have to pay Private Mortgage Insurance (PMI), which would be at an LTV of 80% or lower.
• to reduce the amount of interest we are paying over the life of the mortgage, as well as the total term of the mortgage. If I remember correctly, the common statistic is that if you pay an extra mortgage payment per year, you will shorten your mortgage by about 9 years.

These are both Very Good Things (VGT™) in my opinion. Some would disagree about the advantage of prepaying your mortgage over investing that extra money, but we’ll get into that another day.

The problem is, assuming the housing market stays depressed for another few years, and we decide to sell our home before the values come back up, and we have to pay a real estate commission on the sale, we will most likely be unable to sell the home for more than the balance of the mortgage!

The positive spin would be that we’re prepaying to avoid owing more than what we can sell our house for, which is worth doing in order to avoid being trapped here if we ever want to move. It doesn’t stop it from being depressing though!

I know I’ve said this before, but I’m hoping to get into the regular habit of posting here. If not about our specific situation, then about personal finance in general. It seems like a waste of space to have this blog and not share what we are learning along the way.

Anyway, for now, a quick update. Debt repayment is continuing, slowly but surely. We continue to pay additional money towards our mortgage, auto loan, and homeowner loan. We received a decent refund on our tax return, which was used to pay off some of the money we owe to relatives, as well as some 0% financing we received for our living room furniture and our fence, which we had another year of 0% on, but it seemed better to eliminate those debts while we can.

On a slightly frustrating note, our mortgage lender miscalculated the amount they were escrowing for our tax payments, so we were just notified that our escrow payment is going up by about $40 per month. In addition, because there is a potential shortfall about 8 months from now (when homeowners insurance is due), they are increasing that payment by another $60 (for the next 12 months only) to shore up the escrow account. This isn’t a problem from a budgeting perspective, since we were already paying almost $250 extra on our monthly payment to pay down the principle, but the net effect is that we will only be paying $150 towards principle for the same payment.

All in all, things are still going well, but I feel like we’ll never be out of debt! We are trying, but it’s tough.

Sorry for the long hiatus on posting; we’ve both been extremely busy, with work, kids, and the holidays.  We’ve also made some significant changes which are going to help us with paying down our debt a little faster.

Changes to our debt:

1. We originally had a “piggy-back mortgage” for our home.  This consisted of a primary mortgage of around $240,000 at 6.625% and a secondary mortgage of around $60,000 at 9.125%.   The main problem was that the first mortgage was an interest-only loan, and it was also a 2/1 ARM.  So this mortgage was scheduled to go adjustable in November.  Also, in our 2 years in our home, we’ve paid off very little of the principle.  We have refinanced into a traditional, 30-year fixed loan at 7% (I know it’s a little high but it’s the best we could do with our debt) for $310,000.  This increase our payments slightly due to our actually paying principle + interest now, and PMI.
2. We had 3 cars; a lease that was up next year, a financed car that was 18 months into a 72-month loan, and another car that we owned outright.  We turned in the lease early and traded in the financed car for another financed vehicle that met our current needs a little better.  This resulted in a lower monthly payment than the two combined vehicles, plus it’s a 48-month loan so it will be paid off quicker.  Also, it reduces our auto insurance premiums by about a third.
3. We took out a debt consolidation loan for our credit cards at 9%.  This saves us a considerable amount of money on interest, as our lowest credit card rate was 14%, and some of our creditors chose to increase our rates in recent months.

So now our debt is concentrated in three major loans: mortgage, auto, and debt consolidation.  The minimum payments to these three loans is considerably lower than what we were paying to the dozen or so creditors we had before.

This is part of the strategy we have been using to improve our financial situation.  We have taken the following steps:

1. I am working more hours.  My current position is paid at an hourly rate, which means by putting in a few extra hours per week, I can bring home some extra cash at the end of the month.
2. Jamie is selling some of our old stuff through Craig’s List.  We have a surprisingly large pile of stuff that we no longer use, and people are willing to pay a  surprisingly decent amount of money for it.
3. We are increasing our payments to our three major loans beyond the minimum.  Currently, we are paying about 12% extra on our morgage payment, which equates to an extra payment and a half at the end of the year.  We are paying an extra 10% to our debt consolidation loan, which is slightly more than one extra payment at the end of the year.  And we are paying around 5% extra to the auto loan for now, which I’m hoping to increase soon.

Hopefully, I’ll have some more good news to report soon.  I think we are making good progress.

There are obviously tons of strategies out there for repaying your debts.  All have their benefits, and their drawbacks.  I’m going to explore three different options today, all of which assume you have the ability to make your minimum payments.  If you can’t make the minimum payments, there are other options out there.  I’ll discuss those in a separate post.

1. Debt Snowball method -  this method provides more benefits from a psychology perspective rather than applying good financial sense.  The approach here is to list all your debts in order from smallest balance to largest.  Then begin paying only the minimum payments on all debts except for the first one on the list, to which you will pay whatever extra amount you can afford.  The idea is that you will be able to more quickly pay off the smallest debt, and then you can apply the extra money plus the minimum payment from the first debt to the next one on the list.  This will give you the satisfaction of reducing the number of creditors you owe money to, while not giving you much of an advantage from an interest perspective.
2. Debt Accelerator method - I’m not sure if this is the correct name for this method, but it seems like as good a term as any.  This method was told to me by a friend, and seems to make better financial sense that the previous option.  In this method, you take all your debts, and order them from highest interest rate to lowest.  You use the same approach of applying any extra money to the first item on the list, and work your way down the list adding the minimum payments of the eliminated debts along the way.  This approach should end up saving you the most money in interest payments in the long run.
3. Home Equity/Debt Consolidation method - This method involves obtaining a loan using the equity in your home (or your home as collateral) for a loan to pay off all your debts.  The advantage here is that you should be able to obtain a loan at a much lower interest rate than you have for your credit cards.  This should allow you to pay off the sum total of your debts in a much shorter period of time.  There are a few drawbacks to this method, not the least of which is that it requires you own a home, and have some equity in it.  The other problem is that you are exchanging a number of unsecured debts (credit cards) for one large secured debt (a home equity loan).  Whereas you could potentially claim bankruptcy if you can’t pay your credit card debts, if you can’t pay a secured loan you will most likely lose your house.

I can’t claim to have the answer for which of these methods is the best one.  On the surface, it would appear to me that the second option would be the most sensible one.  It might also be the one that requires the most financial discipline, since it might be awhile before any benefits are noticed, if the highest-interest credit card has a high balance.

If anyone can point out any flaws in these plans, please do so in the comments.  I’d also welcome any other methods for repaying your debts that may be out there.

Inspired by Tricia, I have set up an account on NetWorthIQ to track our current net worth.  There is a link to it on the right-hand sidebar.  As you can see, our net worth is pretty abysmal.

Based on some of the things I have been reading on other personal finance blogs I think there are a few methods we could be using to more efficiently reduce our debt.  I’ll write about them in the next few posts.

Hello everyone. The purpose of this blog is to chronicle our efforts to dig ourselves out of the hole we’ve gotten ourselves into. My name is John. My wife Jamie and I have managed to accumulate a large amount of debt, and we recently realized we’re at the point where we are having trouble meeting the minimum payments on our credit cards.

How did we get here? Well, a little more than two years ago, we were living in an apartment, and were largely debt-free. We had a small amount of credit card debt (I believe it was less than $5,000), and were doing pretty well in our careers. When my wife became pregnant with our second child, we (mostly John, as I’m sure Jamie will tell you) decided to purchase a home.

To make a long story short, although we tried to be economical, we bit off more than we could chew. While we have managed to make it so far, we owe that largely to the assistance of relatives and the overuse of credit cards. To top it off, the mortgage used to purchase our home will be going adjustable in a few short months, at which point our payments will go up, and will probably continue to go up every six months for the next few adjustment dates.

This has caused a fair amount of stress in our lives, and we are doing our best to improve the situation. I hope by documenting our progress on this blog, we will be able to remain focused and succeed in our goal of becoming debt free. I intend to post detailed information on our debts, our strategies for paying them off, as well as our progress. I will also post any information I come across that I think will be useful for others, even if it doesn’t apply to our situation.

For anyone in a similar situation, good luck. We’re all going to need it!