Category Archives: Savings

Not just about saving in a piggy bank or for a rainy day, but also about saving with discounts and deals.

Mortgage acceleration payoff programs – some caveats

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2013-04-17_11-58-16Do NOT waste $3000 on the Money Merge Account program from United First Financial to eliminate your mortgage in a few years.  It is cumbersome, time consuming, and limited.  All their hype about algorithms and such with the juggling of at least 2 accounts is easier achieved with chunk payments.  [This company has changed their name to “Worth Unlimited” – same players, same game.   Mahalo to Joe Taxpayer for alerting me to this on his excellent site:  JoeTaxpayer.com.]

A recent online class I took taught the basics of early mortgage payoffs with a HELOC or any other interest bearing line of credit.  This ingenuous method was the brainchild of a couple of Australian women who wanted to beat the system of the 30 year mortgage.

Take a $500,000 30 year mortgage at 5% (this will be what I will use as the example).  The monthly payment for principal and interest (P&I) is $2684.11.  Property taxes and insurance (T&I) are usually added on to this, but I will not add those in for this example, but be aware that these are additional payments required.  I will also round out the numbers to make it easier to understand from this point on.

With the very first mortgage payment of $2684 (P&I only), $2083 is interest, $601 is toward principal.  The loan is reduced by $601 for a new balance of $499,399.  The next mortgage payment of $2684 is broken down to $2081 towards interest, $603 toward principal, for a new balance of $498,796.  The next mortgage payment of $2684 has $2078 going towards interest, $606 towards principal.  This continues on with the bulk of the monthly payment going towards interest, until year 16 (!) when more of the payment starts going toward the principal because the balance of the loan is lowered enough for that to happen, and your loan principal starts getting paid off faster and faster.  If you make regular steady payments of $2684 every month for 30 years, you will have paid in almost double the amount of the initial loan!

The Australian ladies discovered this “secret”.

Use $10,000 from a line of credit, like a HELOC, to pay towards principal (make sure you specify that to the bank when making the payment).  This will reduce the loan balance by $10,000 to $490,000.  This automatically will “step” you up to month 16 of scheduled payments, and you would have saved over $32,000 of interest, because of the way the amortized 30 year payments are scheduled (16 months x ~$2000/mo interest = $32,000).

You will still have to pay off the $10,000 HELOC advance – but even if that is at an interest rate of 10%, and you pay it off in a year, your “cost” is $11,000, but you saved $32,000.  Your actual cost is only the 10% interest ($1000) but you are taking out a loan that has to be repaid, so I include the sum in this calculation.  Even so, the savings are big time!

If you can do this 18 years in a row, your mortgage will be paid off in full, 12 years ahead of time, and you will have saved $214,000 in interest.  The sweet spot seems to be in the 9th year, when the mortgage payments begin to weigh more on the principal than the interest.  For $90,000 of pre payments (9 years x $10,000), you save $178,000 in interest.

For this to work, you will need enough income to pay down the $10,000 HELOC every year.

Compare this to:  if you did nothing but pay your regular mortgage monthly payments for 30 years without any additional principal payments, you will end up paying $466,000 in interest for your $500,000 loan.

Another way to battle this 30 year mortgage debt is to pay $1000 more per month towards principal reduction.  This works out almost the same as a $10,000 principal reduction payment once a year.

You can “play”with the numbers using Joe Taxpayer’s spreadsheet (click on green “My MMA spreadsheet”, then open the xls document) which allows you to change the terms and amounts of the loan, as well as adjust any payments.  You can then see the interest savings as well as the principal balance remaining for whatever scenario you chose to adopt.

In general, it seems that the more you can put toward principal at the beginning of the loan, the greater the savings on interest.  Which has me thinking of a new strategy the next time I borrow on our home.  Instead of going for the highest loan value at the fixed 30 year rate, I might be better off getting a lesser loan, and getting a higher HELOC.

The advantage of a 30 year mortgage is the fixed rate and the length of time the loan is available.  However, the monthly payment does not change, whether you owe $500,000 on the loan or $50,000 on the loan.  Fees and points are added into the loan which can easily top $10,000 of additional cost from the get go.

The advantage of a HELOC or interest only loan is that you use it if you want or need to, and the monthly payment decreases (or increases) as your balance changes, and these are usually loans without fees or points.  The disadvantage is that the interest rate fluctuates and the loan usually expires in 10 years.  HELOCs can also be closed at anytime at the bank’s discretion.

Currently, interest rates are very low – 5% or a little less for a 30 year conventional mortgage.  These methods of paying down one’s mortgage faster makes sense, and it makes even more sense and has more interest saving advantages when the loan is at higher interest rates.

Although I would love to have a home debt free, it is also a waste of potential for me.  Sitting on a house with 100% equity is like sitting on a pile of gold.  It is great to have, but it is just what it is.  This is Suzie Orman’s ideal retirement model – owning your home debt free.  This does not, however, mean expense free.  You can still lose your home due to catastrophic medical or unforeseen expenses, to lawsuits, fraud, and your own intended heirs getting greedy.

I would rather use as much of the equity that I can in order to acquire more cash flowing assets such as rental property.  Good rental property.  These cash flowing assets can be the income used to pay the mortgage payments on our financed home.  Sweet chickens!

Additional income from your investments can pay down mortgages on the properties.  This is good debt being paid off with cash flow that is forever.

Susie Orman’s message of eliminating all debt can backfire and leave you looking like a target with limited options.  Learn the difference between good debt (used to acquire assets that put money in your pocket) and bad debt (doodads, toys, trips, jewelry, clothes, etc.).  Avoid and eliminate bad debt, use good debt to get rich.

Aunty just found a really good article over at the FinancialMentor.com about the pros and cons of paying off your mortgage or investing.  Really a good read.  Turns out he is a fence sitter, but he has a solid fence in place.

Ross is like dessert

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One of the best known discounts to mankind is senior discount Tuesdays at Ross Stores.  Anyone over the age of 55 gets 10% off on all their purchases. (See Aunty’s discount pages for more discounts.)

This past week, Aunty had to kill about an hour of time in Downtown, so I headed over to the Ross Store next to Long’s Drugs near Fort Street Mall.  It seemed almost everything Aunty touched was what Aunty needed or wanted!  Shopper’s delight.  The store was clean, lots of open space, and not at all crowded.

The whipped cream on the jello was a gift card that I had purchased on Cardpool.com.  Aunty found out about his site from pal JW who commented on one of Aunty’s discount pages.  JW wrote: 

One site that has been good is http://www.cardpool.com
Advantages: 1- Great discounts
2- No Fees
3- No expiration date
4- No sales tax
5- Free shipping
6- No age restrictions
Click on “buy gift cards” and all of them appear alphabetically. These cards are like cash so you can take advantage of store sales discounts, along with the card discount. My favorite, using the 20% discounted Ross card on Tuesdays( Senior discount) to get a whopping 30 % off total, along with their normally marked down prices.
This discount card site has been very reliable and fair, so far.

So Aunty’s jello was the senior Tuesday 10% discount, and the whipped cream was the 20% discounted Ross gift card purchased at Cardpool.com!  [Note:  the Ross gift cards are now sold for a discount of 13%.  Not as good as before, but still, a savings especially if using them on senior Tuesdays!]

Aunty now has new duds that were inexpensive to begin with, and got cheaper with age and a discount card.  Very sweet, very sweet indeed!

Roll over Roth IRA!

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Roth IRAs are Aunty’s favorite way to save and invest.  We first put tax write-off-able funds into a SEP IRA (or regular IRA) and then converted them into a Roth IRA.

Is it a good idea?

Well, the February 12, 2012 issue of Forbes magazine says it is a great idea and calls it a backdoor Roth.

All IRAs are good because gains (capital long or short term, dividends, interest) are allowed to grow without taxation from Federal or State.  Tax deferred is the description used for regular IRAs.

Roth IRAs are the best because of the tax break on the back end when you draw out the money during retirement years (so you pay zero taxes), withdrawals are not counted as extra income against Social Security benefits, and you don’t have to take withdrawals if you don’t want to – which will allow you to leave the entire account to your heirs and their subsequent tax-free withdrawals after you “go”.

Why doesn’t everyone have a Roth IRA?

To directly contribute to a Roth IRA has limitations.  Contribution limits are only $5,000 per year ($6,000 if you are 50 or older) per person.  When your income exceeds annual limits for your tax filing status, you become ineligible to contribute to a Roth IRA.  In the case of most Roth IRAs, the funding of these accounts is made with after tax dollars – so you don’t get a tax break from the deduction from income the way you do with a regular IRA or 401(k).

Regular IRAs (SEP, SIMPLE) do not have as restricted a contribution limit – so that, and the fact that contributions are tax deductible make this a popular choice for many individuals.  However, when you are older and ready to take distributions (forced to take at 70 1/2), these distributions will be taxed at your regular income tax rate at the time.  : (

So what can you do to boost your Roth using your regular IRA?

Take advantage of the generosity of the IRS’s new rule which began in 2010.  Regardless of your AGI (adjusted gross income), you can convert your regular IRA funds into a Roth IRA account.  The caveat here is that you must pay income tax on the entire conversion amount – it is considered to be income when you convert because prior to, in the regular IRA, you were able to deduct the contribution from your income for tax purposes.

It is also VERY important that you do not “touch” the funds as they transfer – bank to bank or institution within the established accounts is the way to do it – so that it is not considered a distribution to you in any way, shape, or form.

Even better?

The February 2012 Forbes article entitled “Roths for The Rich” walked readers through the process of “dancing a little two-step through the Roth’s back door”.  It is called a “roll-in” and consists of rolling your regular IRA funds into your workplace 401(k) to limit your conversion tax hit.

Once the transfer is complete, make new aftertax contributions for 2011 and 2012, and then convert at little or no tax cost.

For each tax year that you make a nondeductible (aftertax) contribution to an IRA, you must file a Form 8606 with your 1040.  Any contribution you make for 2011 gets reported on form 8606 for 2011 – even if you make the contribution in 2012 (before April 17).

Any 401(k) roll-in or Roth conversion you do in 2012 is reported on this form also, but filed on your 1040 for 2012.  During that tax filing in 2012, you will need to include as “IRA distributions” the amount you rolled into your 401(k) as well as the amount you converted to a Roth.  If this is done correctly, you can write “0” as the taxable share of those distributions.

What does that mean?

To tell you the truth, Aunty doesn’t really get it (so ask your CPA or retirement specialist).  All I know is that IRAs are good, Roth IRAs are best.

What does Aunty and Uncle do?

We convert our SEP IRA funds into Roth IRA accounts and pay the taxes due for that year.  To offset that tax hit, we contribute to our SEP IRA an amount equal to the converted amount.  The result is a tax hit in and a tax hit out, which means we pay our regular tax for the year without benefit of deduction or additional taxes for conversion.  In this way, the $5,000 ($6,000 for us because we are older) limits for Roth contributions are nullified because our SEP IRA contributions can be whatever max allowed based on income, and the conversion has no dollar limit rules.

What about young people?

Open a Roth IRA account today.  Most banks, brokerages, trust companies, credit unions and other financial institutions have Roth IRAs.  A good one for people who like the control of trading stocks and options is a self directed Ameritrade account.

Even if you start with the minimum of $2000 in your new Roth Ameritrade account, it is a good start.  Linking your bank account will allow you to transfer money into the Roth IRA, and Ameritrade is very good at providing the status of your contribution by current year and how much more you can contribute.

If you don’t want a self directed IRA for stocks and options trading, then any bank or financial institution will do – just be sure you check their fees and such.

If you know you want to invest your IRA funds for real estate, gold and/or silver coins, or other investment choices, then IRA Services Trust is a good one – low annual fees, little or zero fees for transaction.  I will be updating with a “how to” set up and use your IRA for real estate investing as soon as we complete one this year.

In short, any time you invest in a retirement account, you will be grateful in your golden years when your eyes can feast on the grown tax deferred assets in your retirement portfolio statements.

Here’s to your continuous good health and wealth!

 

 

 

 

 

Just found – another website with fab discounts!

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Thanks to friend Brenda, here is a website MrMealDeal.com (suggest you bookmark it) that offers great discounts for places we all go to for ono kine grinds!  Choose the restaurant and print the coupon.  Some of the places I go to such as Makinochaya, Maple Garden, PF Changs.

One name that always catches my eye is Fook Yuen Seafood Restaurant in McCully.  Years ago, John Heckathorn reviewed the restaurant for Honolulu Magazine.  His comment at the end was – if they opened another branch – it would be called Fook Yuen II.  Say it to yourself (but softly).  That man’s reviews were always entertaining.

For more savings, please visit my other pages on saving.