Here's my letter to Jeannine with some solutions that could save her thousands of dollars and most importantly, save her and her husband over ten years on paying their credit cards. They're a young couple and if they make these changes now, it will significantly change their financial future.
My letter to Jeannine:
Preliminary Numbers/Calculations for Jeannine
April 17, 2009
The mortgage
If you have a good relationship with your lender, now might be the time to look at refinancing your mortgage only with respect to your rate. However, I’m not familiar with Wells Fargo and any hidden charges they might have. Since rates have dropped substantially, you can’t actually break your mortgage without fees if the term hasn’t expired (i.e. if you locked in to a 5 year term at 5.75% and let’s say you’re in year 2, if you broke that mortgage and went to another lender, you’d have to pay a huge fee). However, what most banks will do is give you a blended rate (an in-between the posted current rate and your existing rate without fees). Again though, I don’t know if/what Wells would charge and their policy…but it’s worth a try.
Here’s my assumption – with current 5 year terms at 4.5% (some even lower if you negotiate the rate down) and your current rate of 5.75%, you theoretically could get a blended rate of say 5.00%. Here’s my numbers on that assumption:
Current mortgage payment - $1,928.50 *
Total interest paid in the 40 year life - $560,456.66 **
New blended rate payment - $1,747.63
Total interest paid in the 40 year life - $473,868.28 **
Monthly savings of: $180.87
Yearly savings of: $2,170.44
Total mortgage life savings: $86,588.38 **
*You’re likely paying by-weekly, but I’m using monthly for ease of this example.
**This is assuming everything stayed the same for 40 years which of course it wouldn’t…but just for the sake of this example.
The Credit Cards
Assuming a minimum payment of 3% per month of the outstanding balance of all the credit cards/lines of credit combined would equal $1,296 per month in minimum payments.
If you only made this minimum payment, it would take 13 years and 5 months to pay the entire $43,191 in current outstanding balances. This would cost you $10,926.21 in interest payments.
If we could change your mortgage to the new blended rate and take that $181 per month in savings and allocate it to paying down the credit card debt, making your total monthly payments $1,477, it would only take you 2 years and 8 months to pay off all the credit card balances with interest charges only equaling $3,253.16 (a savings of $7,673.05 by paying just the minimum.)
Saving for Retirement
I just did a quick calculation … if you now took that just about $1,500 per month that is being used to pay off credit card debt and allocated it to RRSP savings, assuming a 6% rate of return and a 3% inflation rate for 35 years (till retirement), you’d have $3,002,881.
Disclaimer: Kelley Keehn is not a registered investment advisor and the information provided in this document should be considered educational in nature, but it is not a substitute for legal or professional financial advice. If you believe you need the help of a Certified Financial Planner or other investment counselor, please seek a qualified professional.
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2 comments:
Here's an interesting idea that was presented to us: refinance in a way that keeps the payments small, even if this means a longer ammortization, and take the extra money you WOULD have had to pay in the larger payment, and 'plunk' it down directly against the principal at the end of the year (most mortgages allow this). Doing that takes a chunk out of the principle faster, because for the first 11 years or so, a mortgage payment is almost ALL interest. Pay down the principal faster, pay off your house faster!
Thanks Simon!
Actually, her mortgage was already at a 40 amortization. I generally wouldn't recommend going that long (the standard of course being 25 years or less - but then the payment would be higher). I would recommend going with a lower priced house, but, that's what we had to work with. However, even I was shocked at how much just less than 1% reduction in one's mortgage rate could lower the payments so dramatically.
Always appreciate your wisdom and comments Simon. Keep them coming!
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