Are You House Poor? Quit Your B*t*hing. Pay It Off Fast With Simple Math!!

Hello kids, welcome to round #2 for what could be a long and painful stream of hard news. What is the most important topic today, other than what idiot we will elect into office on Tuesday? Ding, ding, ding, you guessed it, the Economy with big, fat, capital F'ing "E"! I laugh at the people at work and around town that are harping on how poor the economy is and how worried they are about it. I ask them how their brokerage account is doing during the down turn and they look at me like I just ask them a question in French. All they have is the 401(k) or what have you and they can't even tell me wtf they have in it. They are worried, because the idiot box said they should be worried. Here's the deal, just relax and ride it out. This is the natural order of things, however, with the bailout and all the perks going to the scumbag (yes, I still use insults orginally used when I was 8) banks and financial institutions. The killer on this is the headline on the front page of the Wall Street Journal, "Banks Still Owe Executives Billions". I thought it might have been a typo and should have read "Shareholders" instead of "Executives".

Anyway, enough of the bs. Let's get down to business. Those of you who have a home or those of you who are looking for a home, but cannot get financing because of the credit crunch, lend me your ears. Purchasing a home in this day and age is a tough. You are looking at good rates, however, the catch is that your credit must be sterling and your debt to income ratio must be below 30%. On top of this, you need at least 8% down in order for most banks to lend you the mortgage. Also, this does not includ the closing costs. Bascially, you will need about 13%-15% in cash of the purchase price in order to get into the home. For first time home buyers, this is a daunting task to save up that kind of scratch, while not making that much money, considering you are early on in your careers. So, take a look at the average house price in the US, which is approximately $215,000, or if you grew up in the Syracuse area, it is about $78,000. I've heard the general rule on paying off the house early is making an extra payment each year. So, lets explore this fantastic train of thought.

We'll assume the mortgage rate for the property is 6.5% and the mortgage is fixed for 30 years. So, for the $215K home, the total paid assuming all minimum payments are made is approximately $450,000, so you paid approximately $235,000 in interest. If you put down the 8% for this $215K home, you'll be financing $197,800. If you make the minimum payment and at the beginning of each anniversary of the purchase, you make an extra payment, you'll pay the mortgage off in about 292 payments with a savings of approximately $85,000. Not too shabby!


If you flip it to the average cost of a Syracuse home at $78K. You put your 8% down and finance $71,760, then make the extra payment on each anniversary date, you'll pay it off in about 292 payments, just like the other house. Funny how ratios work. The savings in the end is approximately $31K.

Here is the problem with the whole extra payment a year thing. Most people do not have the discipline to stick to a plan such as that, especially when there is a adjustment make once a year. People will forget to do it. Just think about how many times you forgot about a family member or friend's birthday. This will slide just as easy, if not easier. Here's the plan. People have very small attention spans, so we need to make the adjustment perpetual or as close to that as possible. Here is the solution, which is simpler and more cost effective. Add $10 to each payment you make each month. For example, if you mortgage payment is $1000 (exluding taxes and insurance), the next month, you make a payment of $1010 and the following month, $1020, etc. This builds up, but as you progress throughout your career, your income will increase, so that this $10 increase will go unnoticed. Of course, if you can afford more, and do not have any other high interest debts, go for it. Here is the savings and the power of compounding. The home will be paid off in about 155 payments with a total savings of about $144K. Flip that over to your Syracuse home and this is the story. You will have the home paid off in about 104 payments with a savings of about $66K. In the long run, you will notice an astonishing difference.

So here is the deal kids. Pay off your credit card debt first, unless you have zero percent interest for a temporary period of time. Once that is finished off, then tackle your car payment and any other debt that does not give you a tax break. Mind you, if you pay down your mortgage, that will build your equity and give the option of taking out a home equity loan or line of credit in which you pay off your debts that you have which do not give you tax break, provided the interest rate difference makes it a proper decision. For example, if your home equity line of credit has an interest rate of 8% and your credit card has a 5% interest rate and your tax bracket is 25% for fed and state combined, you may not want to transfer, because the the interest rate after tax is only 6%, which is 1% more than the interest rate of teh credit card. Well, until next time. I'll offer up my stock picks from 10/13/08. It'll be the super six (ha, I know it is stupid, but the money you can make from these will blow your mind, if you are a long term investor. If you are a short term investor, you will lose in the long run.). Remember, no one is smarter than the market, even though the market is dumb as hell.