Financial Mistakes Couples Make - Mortgage

Excerpted from
Smart Couples Finish Rich: 9 Steps to Creating a Rich Future for You and Your Partner
By David Bach

In this step, we're going to look at the 10 biggest mistakes couples make with their finances-and sometimes with their relationships. By learning what these mistakes are, you can save yourselves considerable heartache ... and a lot of money. I'll warn you now that some of these mistakes will seem so obvious to you that you may find yourself saying, "Well, I knew that was dumb.But remember-knowing something is dumb and not doing it are two different things.

What I'd like the two of you to do with these 10 biggest mistakes is study them carefully and really discuss them with each other. If it turns out that you're making some of them yourselves, don't beat yourselves up over it. Rather, he happy you've learned something new that could conceivably save-or make-the two of you a fortune. In any case, the key is to take action. I don't want yon just to nod in agreement and then do nothing. If you spot a mistake you've been making, correct it. If you come across a solution to a problem that hadn't occurred to you, start using it.

With that in mind, let's jump right in.

Mistake No. 1: Having a 30-year mortgage.

Thirty-year mortgages are probably the most popular form of home financing around. They are also, in my opinion, the single biggest financial mistake people make in this country. In fact, I think 30-year mortgages are worse than a mistake. I think they are a scam-an outrageous scam pushed nationwide by both the banks and the government. And to make matters worse, this scam is about to get worse, because now the banks are starting to push 40-year mortgages.

What's my problem with 30-year mortgages? It's simple. Say you purchase a home with a $250,000 mortgage that you pay off over a 30-year period. Say the interest rate is S percent a year. When all is said and done, you will have actually given the hank $660,240. That's more than two and a half times the original loan amount. Why did you fork over all that extra money? The answer, of course, is that in addition to repaying the $250,000 principle, you were also obligated to pay the bank $410,240 in interest charges.

In all fairness, banks are in business to make money. They like to sell 30-year mortgages not because 30-year mortgages are necessarily a good deal for you, but because they are very, very profitable for them.

Now I also said that the government benefits when you buy a 30-year mortgage. How does that work? Well, to begin with, it was the government that hail to decide to make mortgage interest tax-deductible, right? Do you think the government said, "Geez, let's make the lives of Americans easier by allowing them to deduct a good chunk of their mortgage payments"? Maybe . . . but, then again, maybe not.

Maybe the government's experts looked at the math and saw that encouraging people to take out 30-year mortgages would be a good thing for the government. After all, if you and your partner have a mortgage that you pay off over 30 years, guess when the two of you will most likely retire? You'll retire when you reach your sixties-which just happens he precisely when the government wants you to retire.

Why doesn't the government want you to retire earlier than that-say, in your late forties or early fifties? Because when we retire, most of us sharply reduce the amount of income and Social Security taxes we pay. So if everyone started retiring early, the government might have a tax-revenue crisis on its hands.

Now don't get me wrong. I'm not antigovernment, nor am I suggesting that the hanks and Washington are engaged in some sort of conspiracy. Their policy here makes good business sense for both of them. But here's the important thing: what's good for them is not always good for you or me.

Take Your 30-Year Mortgage and ...

If you've already got a 30-year mortgage, what I suggest is that you keep it. That's right. You can keep the 30-year mortgage you've got, and if you ever get a new mortgage, you should probably get one with a 30-year term as well. The fact is, 30-year mortgages give you a ton of flexibility.

By this point, I'm sure you're thinking that I've gone nuts or you accidentally skipped a page or two somewhere. Wasn't I just going on about how terrible 30-year mortgages are? And now I'm saying you should keep yours-and maybe even get a new one?

Well, here's the trick. By all means take out a 30-year mortgage, but under no circumstances should you take the full 30 years to repay it. If you do, you'll just he wasting all that time and money on interest. A much smarter decision is to pay off your 30-year mortgage early.

To do this, pull out your mortgage payment book and review what your last payment was. Now take that number and add 10 percent to it. That's how much you're going to send the bank next month, and every month thereafter. In other words, if you were paying $1,000 a month before, from now on you're going to be paying $1,100 a month. Inform the bank that you are doing this and that you want the extra $100 a month to be applied to the principal (not the interest).

If you keep this up, you'll wind up paying off your 30-year mortgage in about 22 years. Increase your monthly payment by 20 percent, and you'll have that mortgage retired in about 18 years (depending on the type of mortgage)! In short, this is a simple idea that can easily save you tens-if not hundreds-of thousands of dollars in interest over the lifetime of your mortgage.

It you're at all confused by this, call your bank or mortgage company and tell them you want to pay off your mortgage earlier than the schedule calls for. Ask them exactly how much extra a month you would have to send them in order to pay off your mortgage in 15, 20, and 25 years. Make sure to ask if there are any penalties for paying off your mortgage earlier (chances are the answer is no). Then ask them to send this information to you in writing. Most likely, they'll he happy to help you, and in any case, it shouldn't take them very long to do the calculations.