Couples And Money- Work Together To Make The Most Of Your Money (Part 3)
Andy has never liked debt.
Growing up, he witnessed his parents’ struggle to keep their ever-growing debt under control. Family discussions about money never ended well. Now, with a large mortgage of his own, Andy can’t help but dream about becoming mortgage-free. He has yet to confess to Sarah about his money worries, whether rational or irrational. Andy wanted to buy their new house as much as Sarah did but he knows he’ll feel better when their debt declines significantly.
Sarah is excited to get started on her many creative ideas for their new home. She can’t wait to choose an area rug and curtains for the living room to coordinate with the new furniture they bought six months ago. The kitchen is dated, small and not terribly functional. Sarah has always wanted granite countertops and stainless steel appliances. Maybe, once her annual raise comes through, she and Andy can renovate. At the same time, it might be smart to build a family room or fourth bedroom for when they decide to have kids.
Last week, Andy and Sarah discovered ways to improve their banking and credit habits (click here to read last week’s post)
As we talk, it becomes obvious that Sarah and Andy are on different pages. Andy is desperate to reduce debt while Sarah longs to make her dream home a reality sooner, not later. Sarah reminds Andy how lucky they are. “Everyone has debt in their thirties- we have less than our friends. What is really affordable?” asks Sarah.
We dig deeper into their mortgage. Monthly payments, a 5.75% fixed interest rate (for 4 remaining years) with a 25 year amortization period. “We’ll be 59 years old by the time our mortgage is paid off” declares Andy. “That’s not good enough” says Sarah. “I want more money for travel before then”.
Andy and Sarah are smart, young professionals but had little knowledge of mortgages before they bought their first home. This is common with new homeowners. “It’s so easy to get caught up in the excitement of buying your first home without understanding the impact on your finances” says Andy. “Hindsight is always 20/20”.
There are many strategies to reduce debt faster. Implementing even just one of them is always a good decision. Weekly instead of monthly payments or using excess cash to make lump sum principal payments can reduce the cost and length of your mortgage substantially. So, too, can increasing your payments as your salary rises. While the interest rate offered by lenders is often beyond one’s control, your credit rating is not. We discover that Andy has a strong credit rating but Sarah’s needs improvement. Her late bill payments, multiple credit cards and periodic unpaid balances led to a less than stellar credit rating. Consequently, the couple were unable to secure the best rate possible for their mortgage. “It’s not that I couldn’t pay off my bills” Sarah explains. “I just didn’t pay attention and realize the importance of doing it.”
We crunch some more numbers using an online mortgage calculator. Both Sarah and Andy are shocked to see how much they can save under different accelerated payment scenarios. “I have a new goal” Sarah says. “Get smarter with money and pay down our mortgage sooner. The renovations can wait”. Andy is happy and relieved. “It’s all her idea and we didn’t even need to fight about it. How priceless is that?!”
Next week: Andy and Sarah learn new investing strategies
Photo courtesy of business.financialpost.com