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FINANCIAL FREEDOM WORSHOP
Developed from the books Your Money Map: A Proven 7 Step Guide to True Financial Freedom and The Total Money Makeover.
- You’ve been pulling together figures from your expenses and your income for over a month now.
- Hopefully you have a balanced budget in place.
- Be sure to use a system to implement your budget.
- Find a way to determine if you are staying on track each month.
- First we talked about getting out of debt.
- Next we looked at how to stay out of debt by saving up for future expenses.
- Today we will look at the largest purchase more people will ever make.
THE ROAD TO FINACIAL FREEDOM
- Begin using a spending plan
- Save $1,000 for emergencies
- Pay off credit cards
- Increase savings to one month’s living expenses
- Pay off all consumer debt
- Increase savings to three month’s living expenses
- Begin saving for major purchases (home, auto, etc.).
- Begin saving for retirement.
- Begin saving for children’s education.
- Begin saving to start a business. (If this is a goal for you.)
- As you start this Destination, you are now one of the top 5 - 10% of Americans because you have some wealth, have a plan, and are under control (Dave Ramsey).
Buy an affordable home.
Pay off your mortgage.
29He who troubles his own house shall inherit the wind, and the foolish shall be servant to the wise of heart.
BUYING A HOME
- We learned in the previous Destination the importance of saving for a good down payment for a home.
- It’s best to save up at least 20% for a down payment before buying a home.
- Monthly payments will be smaller.
- Eliminates need for expensive PMI (Private Mortgage Insurance)
- PMI costs $65 - $70 per month per $100,000 borrowed (Cost avg. $840 - $1,680 per year)
- PMI is basically foreclosure insurance
Renting -vs- buying
- Some will advise you that it is always better to buy than to rent.
- This is not true.
- It is better to rent a house you can afford than to buy one you can’t.
- This is why the destination for buying a home is after you have paid off your debt.
- If you are in debt up to your neck, buying a home is the last thing you want to do.
- Also, when you rent, you do not have to pay for unexpected and often costly repairs to the home.
- If your money is tight, it is better to rent until you get to this Destination in your journey to financial freedom.
- Your total housing expenses should not exceed 40% of your gross income.
- Your total housing expenses will include:
~ mortgage payments
~ real estate taxes
- You can estimate the cost of maintenance to be 1-2% of the value of the home each year.
- Dave Ramsey says to never buy a home that would have a payment of more than 25% of your take home pay.
Dave Ramsey Advice
- Make sure you don’t borrow more than it is worth.
- Some banks today will lend you up to 125% of the value of the home.
- Some use the extra 25% to payoff credit card bills and call this restructuring their debt.
- This is a good way to get stuck with a house you can’t afford.
- It could lead to foreclosure.
- You also end up paying on credit cards for 15-30 years.
- If you cannot afford a house right now there are three things you can do: pray, save, and wait.
Assignment from last week
- Do you own your home? Find out how much you owe on it and how long it will take to pay it off at your current payment rate.
Prepaying the mortgage.
- One thing that is important to understand is the way interest is paid on a mortgage.
- Interest is front loaded on a mortgage.
- In the beginning of your loan repayment, your payment will go primarily to paying interest.
- In fact, in a 30 year mortgage, it is 23 years before the interest and principal portions of your payment are equal.
- With a 150,000 home loan at 7.5% you will pay $12,585.84 each year.
- In the first year only $1,382.73 of those payments will go toward the principal (the loan amount).
- If you pay around $100 extra per month, you will save around $900 in interest over the life of the loan.
HOW TO PAY IT OFF QUICKER
Reduce the length of the mortgage.
- If you are getting a new mortgage or it is a good time to refinance, use a 15 year mortgage.
- On a $150,000 home loan at 7.5%, by the end of the loan, you will pay $92,683 in interest on a 15 year mortgage and $227,755 in interest on a 30 year mortgage.
- By using a 15 year mortgage you will save $135,072!
- Some say you should take out a 30 year mortgage and pay if like a 15 year mortgage so if something goes wrong, you will have wiggle room (Dave Ramsey).
- The problem with this? “Something will go wrong” (Dave Ramsey).
- The FDIC says that 97.3% of people do not systematically pa extra on their mortgage.
Add to the required payment.
- If you are already in a 30 year mortgage and it is not a good time to refinance or if you will be moving in the next three years you can simply pay extra each month.
- A 30 year loan will pay off in 15 years if you make the same payments as a 15 year mortgage.
- If you can’t refinance right now, make these payments until the house is paid off or until you can refinance.
- “Two-hundred and fifty dollars more per month (on a $130,000 loan) will save almost $100,000 and 15 years of bondage” (Dave Ramsey).
Bonuses and tax returns
- When you are Gazelle intense, you will use extra money you receive to pay off debt.
- Use any bonuses, tax returns, or tax stimulus checks to pay down your home loan.
- You could shorten your loan by a matter of years instead of taking that cruise with the money.
- Let your lender know what you are planning.
~ You may want ask what would be the best way to do it to make it easier for them and you.
- Write a separate check for the extra amount you are paying.
~ Note on the check it is for “Principle Only”
~ This creates a paper trail should their be a question on what was paid.
- Create a payment schedule (amortization schedule).
~ This will show how much faster you are paying off the loan.
~ It will be a great encouragement to you.
~ This process of pre-payment will take years. You will need all the encouragement you can get.
~ Find a mortgage calculator at www.crownmoneymap.org
- Once a year contact your lender to confirm the unpaid balance.
~ Make sure the lender is properly applying the extra payments to your principle.
- When interest rates drop, it may be wise to refinance your mortgage to save money over the life of your loan.
- You will pay fees and closing costs when you refinance.
- “Points or origination fees are pre-paid interest” on a home loan (Dave Ramsey).
- “When refinancing, ask for a ‘par’ quote, which means zero points and zero origination fee” (Dave Ramsey).
- The rule of thumb is, if you can cover the cost of refinancing with what you save on interest in two to three years, it is a god idea to proceed.
- Don’t use the refinancing to increase the size of the loan.
- Your goal is to reduce the years of the loan not increase the size.
- If you can reduce a 30 year loan to a 20 year loan for the same monthly payment, do it!
Mortgages to avoid.
Adjustable Rate Mortgage
- You may get a lower interest rate in the beginning.
- But, when the market turns, the interest rate will increase.
- The A.R.M. was born to transfer the risk of higher interest rates to you, the consumer” (Dave Ramsey).
- These loans may offer a lower interest rate but the balance of the loan may be due in 36 to 60 months.
- People that are considering staying in a place for a short time may consider this type of loan.
- The problem is, balloons pop!
- If your plans change or you can’t sell the house, you will be facing foreclosure if you can’t pay the balance in full.
Bi-Weekly Payment Loans
- Most of these offers come through companies that charge you for this service.
- You can make an extra payment per year or add 1/12 to your payment each month do the same thing your self without a fee.
Interest Only Mortgages
- This is a loan where you only pay the interest (like renting a home).
- The advantage is that the payments are lower.
- It will also enable you to get into a more expensive home.
- This is very dangerous!
- If the home drops in value, you will owe more on the house than it’s worth.
- If the rate is adjustable, the payments could go up and you will be stuck in a house you can make the payments on facing foreclosure.
- This is expensive and only covers the lender should you loose the house in foreclosure.
- You can avoid this by making a down payment of at least 20%.
- If you have been paying PMI on your loan, check to see if you have paid down at least 20%.
- They will not drop this insurance automatically.
- If you are accelerating the payments, this is another reason to check to see if PMI can be removed.
Home Equity Line of Credit
- Some use this to borrow against there house to get a good interest rate.
- “This is very sad because we now put our homes at risk to go on vacation, open a business, consolidate debt, or just for an emergency fund” (Dave Ramsey).
- “Emergencies are precisely when you don’t need debt” (Dave Ramsey).
- “These loans are very dangerous, and an unbelievable amount of them end in foreclosure” (Dave Ramsey).
- Most HELOC’s are renewable annually, meaning they requalify you for the loan once a year” (Dave Ramsey).
- This means if your financial situation changes or you go through an unexpected money crises, the bank could call the loan and you will lose your home if you cannot pay the line of credit in full.
DEBT FREE HOME!
What about the tax deduction?
- When you are making payments on your home, you get a deduction on your taxes.
- Some say it is better to stay in debt on your home so you don’t lose the deduction.
- Let’s look at the math.
- “If you have a home with a payment of around $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction” of around $3,000 (Dave Ramsey).
- Some say you should keep paying the bank $10,000 so you don’t have to pay the IRS $3,000. Does this make since?
- Larry Burket used to say, “You pay me $10,000 and I’ll give you back $8,000 and you’ll get a better than the IRS.”
- It is better to pay off your home.
- If you want the same tax deduction after you pay off your home, just make a $10,000 contribution to the church and you will get the same $3,000 tax deduction from the IRS.
Can’t I make more by investing the money?
Dave Ramsey Advice
- Financial planners will tell you to borrow against your home at 8% and invest in the stock market and earn 12%. Your will make a 4% great return. Or will you?
- If you borrowed $100,000 on your home you would pay $8,000 in interest. Then if you invested that $100,000 in the market and earn 12% you would earn $12,000, earning a $4,000 profit.
- But remember, you will have to pay taxes on the $12,000. In the 30% tax bracket you will pay $3,600 in taxes and $2,400 at an ordinary tax rate.
- This brings your earning down to only $400 - $1,600.
- This is all assuming the economy is good and strong.
- Is it worth risking your home for this small return?
- One lady wrote: “When we paid off the last mortgage payment, I was surprised to feel a wonderful sense of freedom and relief. I realized that if Howard would die before my children went out on their own, I would be able to continue raising them in our home. That was a huge source of comfort.”
- Dave Ramsey states, “Our observation of families who stay gazelle-intense is that they pay off the mortgage about seven years from the date they declare way on the culture, from the date they decided to have a Total Money Makeover.”
Free you income for better things.
- “If you invested what you pay in monthly payments, you’d be a debt-free millionaire before long” (Dave Ramsey).
- When you’re money is not tied up in your house, you can do neat things like give it away!
- John Wesley said, “Earn all you can, save all you can, and give all you can.”
- Next time we will look at doing just this.
YOU CAN DO IT!
and Joe (43)
We started Dave’s plan for a Total Money Makeover in 2002 with over $2,000 in a home-equity loan, credit card bills, a $30,000 mortgage, and no emergency fund or savings. We were living on about $45,000 and felt out of control. When we learned about the Baby-Step process, we knew that it was the best way out. We started working through the baby Steps as quickly as we could and our lives began an immediate change.
We knew we had to first get on a budget and get that Debt Snowball going. The best way to jump-start things was to have a garage sale. It was great! We made over $500 and paid off quite a few bills immediately. We continued to work and save and work some more. We were determined to beat the system and press forward. We paid off the consumer debt, fully funded our emergency fund, and started investing. We were amazed with how focused we had become on getting completely out of debt.
But we didn’t stop there - the ultimate challenge was to pay off the house. This was one of the most challenging things I’ve ever done in my whole life. I got a second part-time job cleaning offices thirty hours a week in addition to working full-time. Joe worked overtime seven days a week. For five grueling months we worked harder than we ever had in our entire lives, but we knew that it was worth it. And then, finally, in September of 2005 we reached our goal. We paid off our house making us completely DEBT-FREE!!!
It was unbelievable the feeling of freedom that comes when you don’t have the weight of payments hanging over your head. We can now focus on saving for retirement entirely and start really living! I even quit my job and started my own business so I don’t have to fo to a dreaded J-O-B every day; I get to do what I what I love. Good things really do come to those who wait.
God has definitely blessed us through this experience. For the first time, our future plans won’t just seem like a dream, but we can make them a reality. If we an do this, anyone can!