Your Home and Car Savings Questions Answered

Q: She's taking about pre-paying your mortgage. Yes sure, that will work during the life of the mortgage... that's not an instant savings... it's a long term savings... so you have to increase your monthly payments, which you cannot afford, in order to save in 30 years... How many people in this unstable economy can afford to increase their monthly expenses, to save for the future? Also, how many people stay in the same house for 30 years? Not many. So bottom line what I saw will not help anyone NOW, it will help you in 20 or 30 years from now.
~Read My Lipstick

A: Here's the deal. A mortgage is a financial obligation that you took on that you are going to have to pay one way or another. You can prepay just a tiny bit of it now and save tens of thousands of dollars. Or prepay nothing and save nothing. On a $150,000 mortgage at 5.5 percent, you can save $11,000 by sending in just $25 extra per month! You can save nearly $37,000 by sending in an extra $100 a month. When I did a savings makeover for a Baltimore family, I showed them how they can save about $5,000 a year by taking simple steps with their groceries and car insurance. They plan to roll just a little bit of that immediate savings into prepaying their mortgage to save even more! This reader was also dead wrong in saying that prepaying your mortgage only benefits you if you stay in the house for 20 to 30 years. In "SAVE BIG" I did the math for a family with a $200,000 mortgage at 7 percent interest. If they send in an extra $50 a month, they will still save $8,654 if they sell in 10 years! Dismissing the power of prepaying your mortgage is short sighted. This reader needs to learn to think BIG!

Q: We just refinanced our home. The old mortgage had a 6.98 percent interest rate and would end in 2025. With the lower rates we refinanced at 4.5 percent for 15 yrs so our monthly payments are $112 lower. We are comfortable with our old payments and plan to continue paying that amount shortening our time frame from 15 years to 12 years. So instead of ending in 2025 we are paying the same amount per month and it will end in 2022.
~CR

A: Bravo! Refinancing is another time when you can find "free money" via a lower interest rate and use it to prepay your mortgage. And being mortgage free several years early is the other fabulous fringe benefit!

Canceling Private Mortgage Insurance

Q: First of all if you have PMI (private mortgage insurance), the bank will not let you do away with it until you have paid down your mortgage 20%, which it will take years before you can pay it down!
~Read My Lipstick

A: This reader criticized my savings strategy that by prepaying your mortgage you can then cancel private mortgage insurance sooner and save thousands more in those premiums. Actually, you can't cancel PMI until you have 22 percent equity in your home. And prepaying your mortgage certainly will enable you to do this faster. This idea came up in my savings makeover for that same Baltimore family. By sending in an extra $100 a month they will reach the 22 percent mark four years early and save $3,060 in PMI premiums. Yes, this savings will take a few years to materialize. Why are we such an instant gratification culture? That's partly what got us into this recession in the first place -- people wanting it all now.

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