Banking

Most people applying for home loans seek a 30 year mortgage instead of a 15 year mortgage because they worry that they will not be able to meet the monthly obligation of a 15 year mortgage, or they may think that there is no need to pay off their mortgage early.  However, there are important benefits to paying off a mortgage quickly.

• Lower interest paid overall.  If you take out a $200,000 mortgage at 4% interest for 30 years, you will pay $143,739.01 in interest alone over the life of the loan.  The $200,000 mortgage is really a $343,739.01 mortgage when interest is included.
  In contrast, if you take out a 15 year mortgage instead, you will only pay $66,287.65 in interest, a difference of $77,451.36 in interest over the life of the loan!

• Increased cash flow.  If you pay off a mortgage in 15 years, you increase your cash flow by decreasing your expenses, often by a thousand to two thousand dollars a month.  Just imagine having that extra money every month to do with as you please—help the kids out with college, travel, invest, the choices are yours.

• Guaranteed investment.  In today’s market, it is increasingly difficult to find investments that pay a high percentage.  By paying the mortgage off early, you are making a solid investment by reducing your overall interest paid over the life of the loan.

• Less concern about the market.   Housing markets go up and down over time.  If you own your house outright, you are less concerned with these market fluctuations.  You don’t have to worry about being upside down with your mortgage.  Whatever amount you sell your house for will be yours, free and clear after fees.

Steps to Take If You Can’t Afford a 15 Year Mortgage

In the $200,000 mortgage example given above, the difference in the monthly payment amount between a 15 year mortgage and a 30 year is $524.55.  If you can afford the difference, you should take the 15 year mortgage instead.  But what if you can’t afford the difference?  Consider these options to still take advantage of the benefits of paying the mortgage off early:

• Refinance.  Refinancing your home loan at a lower interest rate may lower your payment and allow you to pay extra on the mortgage.

• Make 1/2 payments every two weeks instead of monthly payments.  Doing this will allow you to make 13 full payments a year instead of the standard 12, enabling you to pay off a 30 year mortgage about 5 years early, depending on the size of the mortgage.

• Put any windfall money toward the principal.  Are you getting a $500 bonus at work?  Put that on the mortgage.  You will be surprised how many bonuses you receive throughout the year.

While many people borrow for 30 years, there are definite advantages to paying down the mortgage more aggressively.  Try some of these strategies to lessen the interest burden you will pay over the life of your loan.

Jack is a freelance writer where he writes about topics including mortgage and debt.

A few months ago, MicroPlace, an organization owned by PayPal made an offer that was simply irresistible. They would give you $20 and all you had to do was to take the cash and invest it in their micro lending operation, specifically with the intention of helping victims of the Haiti earthquake to recover.

Not only that, but they would actually pay you interest on the money, offering a rate of interest of 2%, better than any savings account could offer. While that deal is no longer available, it did introduce tens of thousands of people to joys of socially responsible micro lending and investing. Here’s how it works:

Socially Responsible Investing

People in the developing world aren’t necessarily looking for handouts from people in wealthy countries. Many of them genuinely want to better themselves by starting small businesses or purchasing an animal, such as a goat, which can provide an income for the family. However, rather than simply take money for the purchase, many such people are turning to micro lending organizations such as Kiva and MicroPlace to secure small loans to cover the purchases required.

Tiny Amounts, Massive Impact

The amounts of these micro loans are tiny by American or Western European standards – a typical micro loan would be around $100-$200 with interest in the 2-5% range, payable over a course of a few years. The loans have extremely good payback rates, comparable to those of loans made by western banks (and with the recent downturn of the economy, the rates of payback are sometimes higher than those most commercial banks receive).

Spreading the Risk

The reason that the payback rates are generally good is that, as MicroPlace points out, they spread the risk around. This means that the money is not actually loaned directly by them to the people who need it, but is instead loaned to an organization on the ground in the affected country, which will in turn loan the money out to those who need it.

This arrangement allows two things to happen. First, it keeps the logistics simpler, allowing such organization to support multiple locations around the globe. Second, it also allows them to spread the risk so that even if a percentage of the loans are not paid back, there is enough money coming in to pay back the investors who have pledged their money.

No Guarantees

Of course, just like traditional investing, micro loan investing is a risky business where you could lose your money. Kiva and MicroPlace both take great pains to point out that their investments carry a significant amount of risk. However, at least in the case of MicroPlace, they also point out that they have never had an investor lose their money, because of their careful practices, which limit the exposure of any individual investor.

Not a Donation

One other thing to keep in mind when investing with a micro loan organization is that these are not considered to be charitable donations. You cannot claim them on your taxes as such and you do in fact have to claim capital gains taxes if and when the loans mature and pay back the money you gave. Still, when you consider that this is a way to not only do good but also make some money as well, micro lending seems to be a worthwhile idea whose time has come.

George Gallagher is a finance and education writer from Credit Union Student Loans.  He also works with parents to find not-for-profit personal student loans for their children.

Frugality is more than just a way to save money, it is a way for those who are looking for a way to return to a simpler time and a simpler way of living to adjust their lives in such a way that they understand who they really are, and what is really important. While that may all sound very idealistic and a lot like something left over from the 1970s the Western way of life is a very busy one, and we can too easily be swept up in acquiring things and outdoing others, forgetting that it is not the role of our possessions to make us happy – it is up to us.

If you’re wondering about the more tangible benefits of being frugal, consider whether you could benefit from any of these five aspects, which are some of the best things about frugality.

1 – Living within your means

How often do you go to bed with bills and other obligations on your mind? How often do you wish you could go to a job you enjoy, not one you have to go to in order to pay your bills?

When you live a frugal lifestyle you have discarded all of the obligations which were cluttering up your life, and you are left with financial security. This is because you are now more financially responsible, having realising that you don’t need a horde of expensive material possessions to be happy.

When you are not living your life on credit, you are now in the habit of living within your means, spending your own money, and spending less than you earn. Imagine the benefits that would bring to your night-time ritual.

2 – Lower environmental impact

We are all trying to leave a smaller carbon footprint on the planet, buying fuel efficient cars and bringing our own reusable shopping bags to the supermarket. However, by living a life of frugality you take even bigger steps towards a smaller carbon footprint.

For example, you’ll be driving less and emitting fewer greenhouse gases into the environment. You’ll also be swapping or buying recycled clothing so no new wastage is being created, plus you’re helping your local community. You will be more conscious about your food use and waste, cooking smaller portions and reusing left overs instead of throwing them into landfill. Even when you do throw out food scraps, you are creating compost, helping the environment and saving you on costly soil treatments at the garden centre.

You will also have found ways to reuse many items around the house instead of automatically throwing them away. Reusing jars for storage and old clothes for rags will all reduce the amount of waste you are throwing away, as well as making your household more sustainable and self reliant.

3 – Attitude adjustment

We can’t all afford to travel halfway around the world for spiritual enlightenment from wise old monks. However, you will see changes to your attitude, and your relationship with the world when you live more frugally.

When you strip back your life to the true essentials, you find out what you really need to be happy, to live and to function well. A s a result you appreciate what you have and this attitude of gratitude allows you to see that what you have in a loving family and friends, and food on the table is a lot more than many people have.

This will also make you more generous with your time and your possessions because you know what you don’t need, and you can give it to others. You’ll also find you’re not as stressed because you are not forced to work long hours in a job you hate to fund your consumerism, and you’ll have more time to spend with your family because you’re not all out spending money on activities, you’re at home, spending time on activities as a family.

When you are not stuck in a stressful job you have to have, you can experience the freedom which comes with being able to leave your job at the office, or even leave it all together and pursue something which really excites you.

While this sort of attitude adjustment may seem boring to those who are used to a fast-paced life, it is actually challenging as you find new ways to do things you’ve always automatically paid for, and you learn about and create a new life and lifestyle.

4 – Learning and creating

It is easy to go out and replace an item when it breaks, or pay someone to fix it. However, when you are living frugally, you must learn to fix things yourself, keeping your brain active, and rewarding you with a sense of achievement when you have mastered a new skill. You’re not only learning for yourself, but you can also teach your children how to live a more frugal lifestyle.

You’ll also find you will need to be more creative, finding new uses for items, and new ways to do things. For example you may start making your own birthday and Christmas cards, or even your own soap and detergent.

5 – Living healthy

We all want to feel better and be healthier and that is one of the best things about frugality – it encourages you to live a healthier lifestyle every day. You’ll be eating fewer takeaway meals and more fresh fruit and vegetables. You may give up your car and will start to feel the benefits of walking or riding your bike everywhere.

When you do more for yourself, you’re more active and this could be as simple as walking to the store instead of having items delivered, doing your own yard work, taking your own dog for a walk or washing your own car.

Alban is a personal finance writer at Home Loan Finder, a home loan comparison website.

Henry and Maria

Henry, twenty-three-years-old, borrowed more than enough money to attend private school in Louisiana. He
came out of college with $50,000 debt. Henry’s first job out of college had a salary of $38,000 plus benefits. He
went out and got a super cool apartment in a swanky part of town and super cool furniture on credit. He was a sharp
dresser—thanks to MasterCard. He later met a young lady and impressed her with dining at the best restaurants and
nightclubs. As a desperate measure he began taking cash advances from his credit cards to pay bills. His income was
eaten up with payments to creditors: car loan, credit cards, and Sallie Mae. What a life. He was barely thirty-years old
and now over $70,000 in debt. Not able to afford a home, Henry became depressed. Henry went overboard.
Borrowing $50,000 to make $38,000 a year makes no sense. Always research the beginning salary of the major field of study you are going into.

Maria, nineteen-years-old and a freshman at a small college in Texas, was afraid to borrow money at all for college and
dropped out. Once she figured out that her grant was not enough to cover the entire tuition for the year, Maria wanted
to go to college and earn a degree to become a psychologist. She dropped out because she became discourage by the
five-figure debt it was going to take to finish college. She later realized jobs that don’t require a college degree paid
just enough to get by. Frustrated that she is only getting by and not getting ahead, she regrets not taking out loans and
grants to go on to college. By not taking a risk to invest in her future, she paid a bigger price. Sometimes playing it
safe is not the wisest move.

In Henry case, he went overboard when it came to student loans. Had he done a little research on the starting income
of his major he either would have picked a less expensive school or changed his major. Find a happy medium when it
comes to education. Not applying to college at all can also be a risk you cannot afford.

Rule of Thumb: Borrowing money for education makes sense if you do not borrow more than you can expect to earn in a year at your first post-college job.

This guest post comes from L. Marie Joseph, author of First Generation White Collar:  A practical guide on how to get ahead and not just get by with your money. She also blogs at First Generation White Collar