As I’ve mentioned before on this blog, my husband and I are currently in the process of selling our current home and buying a new one. It’s a process that’s been full of more than a few headaches, and – quite frankly – one that I can’t wait to end. Now, we’re starting to consider a new mortgage move: taking out a 15-year mortgage instead of a more traditional 30-year fixed loan.

The Nuts And Bolts

If you haven’t gone through the home loan application process, here is a quick tutorial.

The most popular mortgage out there is a 30-year fixed loan; according to the LendersMark Financial Network, more than 70 percent of homeowners opt for this loan. Why? Because if offers a stable interest rate for three decades, giving you a chance to pay down even a hefty principle gradually over time. The downside, however, is the interest. Even at today’s interest rates in the mid-fours, you’ll still pay more than double your original loan amount thanks to interest.

Adjustable-rate mortgages – called ARMs – got a bad rap in the first decade of the 20th century as the housing market crumbled. However, these mortgages offer homeowners a much lower interest rate – and, thus, a far lower monthly payment – at the cost of a shorter term. A 10/1 ARM gives you a ten-year introductory period with that low rate, but once it expires, you could be paying market values, increasing your monthly payment by hundreds of dollars. Shorter ARMs – like a 3/1 loan – give you an even lower rate, as well as an even shorter introductory period.

So what’s a well-meaning homeowner to do? There is middle ground – the 15-year mortgage. This fixed-rate loan comes with lower interest rates – not quite as low as ARMs, but lower than 30-year loans – and a shorter time frame as well. Because of this shorter term, you’ll pay a higher monthly payment, but you’ll also pay less in interest over the life of the loan than you would with a 30-year fixed.

The Pros of a 15-Year Mortgage

Let’s break down the numbers to see exactly how much a 15-year mortgage could save you. Actually, not you – me. Because I’m going to use the actual numbers from my loan application, as well as the mortgage calculator from our preferred lender.

Right now, we could get a 15-year mortgage on a principle balance of $200,000 at a rate of 3.5 percent; by comparison, the rate for a 30-year mortgage would be 4.25 percent. Factor in the $2500/year tax and $1000/year homeowner insurance fees, and we’d be looking at:

• $1275.55/month for the 30-year mortgage (paying a total of $459,196.72 over the 360 payments)
• $1799.24/month for the 15-year mortgage (paying a total of $302,271.51 over 168 payments – that’s actually 14 years!)

(Because our lender offers PMI-free mortgages with a minimum 10 percent down payment – an industry rarity – we would save more than a hundred dollars a month as opposed to going with a loan that required private mortgage insurance.)

With the 15-year mortgage, we’d be paying about $524 a month more than with the longer term loan. However, over the life of the loan we’d pay a whopping $156,925.21 less.

Not So Fast…

Of course, these calculations aren’t as simple as they seem. The numbers from the a basic mortgage calculator only show part of the story. They assume that once you reach the end of your loan’s term that you won’t be paying escrow any more – but, as we all know, there are two certainties in life: death and taxes (and, in this case, homeowner’s insurance). I’ll be paying those two things for as long as I own the house, regardless of whether I’ve paid off the loan or not. That bumps the overall savings from $156,925.21 down to $104,425.21 – a difference of more than $52,000.

There’s another factor at play here, too: the impact on your taxes. Right now, the mortgage tax reduction allows homeowners to deduct the interest paid on their home loan. By losing that tax deduction for a period of 15 years – with our marginal tax rate of 25 percent – I’d lose out on another $7,586.21.

Also, what could I do with that extra $524 a month I’d be putting toward a 15-year mortgage? Say I invested it every month for 15 years in a Roth IRA with a modest return of 6 percent. By the time I was eligible to withdraw from the Roth at age 59 1/2 (29 years from now), I’d have amassed $354,012.05. Of that total amount, $259,692.05 would have come from interest. That far outweighs the $156,925.21 I’d be able to “save” with a 15-year mortgage – although it also assumes I’d do my due diligence by habitually investing the difference in monthly mortgage payments, without fail, every month… and we all know that’s easier said than done.

Reader, do you have a 15-year mortgage or a 30-year loan? What was the deciding factor for you in your home loan decision?

For the past two years, my husband and I have survived on a threadbare budget. We’ve said no to dinners out, to new clothes, to unnecessary trips across town. Whenever faced with the decision to spend or save, we always opted to put money away for a rainy day – we were convinced a deluge of biblical proportions was looming just over the horizon.

But as the years passed, no such deluge came. Instead of being flooded by rain, we found ourselves flooded by money. All the scrimping and saving we had done over the intervening years had allowed us to do all the things financial experts say you’re supposed to do: building up a six-month emergency fund (check), maxing out our 401(k) contributions (check), saving or investing at least 10 percent of our pre-tax income (check).

We were rife with money… but we weren’t having any fun with it. So six months ago, I loosened the purse strings. I made it rain money in my house. Booyah.

Going Overboard

The first few weeks after I stopped acting like Ebeneezer Scrooge, my husband and I went a hog wild. We spent $75 at a nice restaurant, not to celebrate a birthday or anniversary, but just because. I bought myself a new pair of jeans for the first time since getting pregnant with our oldest child… nearly four years prior. My husband purchased new tools, without a plan as to how he’d use them.

At the end of the first month of our new-found financial freedom, we reevaluated things. Although we’d still paid all our bills, maxed out our IRA contributions, and hadn’t dipped into our emergency fund, we’d failed to make extra payments on our existing debts (specifically, our car loan and my student loans). When we’d loosed the purse strings, the plan was to have fun with money. But by overspending, we’d gone back to where we were years prior, when money was tight: we were so worried about how much we had – or rather, didn’t have – that we weren’t having any fun anyway.

We had to rein it in.

Finding Balance

In month number two, we employed the allowance method. I gave my husband and I $50 each to do whatever we wanted. I expected him to spend it all on tools he wouldn’t (and didn’t know how to) use; he expected me to spend it all on shoes.

But we surprised each other.

Instead of blowing his $50 on a new power sander, my husband split his allowance into five allotments of $10 each:

• He used $10 to go out to breakfast with his coworkers before work one morning
• He used another $10 to enter a fantasy football bracket with some friends
• He spent $10 for new insoles for his tennis shoes
• He paid $10 to take our daughter to the children’s museum one rainy afternoon
• He used the last $10 to go out for drinks to celebrate his friend’s 40th birthday

Likewise, I also broke my $50 down into smaller amounts:

• I spent a total of $16 on four separate occasions to buy myself Starbucks before heading to the grocery store to shop
• I bought a cool new color of toe nail polish for $5 instead of paying $25 for a pedicure
• I used $10 to go out to lunch with my girlfriends
• I paid $7 to buy a six-pack of my favorite adult beverage to share with my husband while watching football one weekend
• I used $5 to participate in a Zumba-a-thon for charity at the YMCA

Faced with the decision to spend or save, I pocketed the remaining $7 to use the next month. I could also contribute to a CD. Check CD Rates here.

What We Learned

Without consulting the other, my husband and I both learned that $50 could go a long way. We employed many of the same budgeting strategies that had helped us build up our nest egg in the first place when it came to spending our monthly allowance money. It’s easy to learn how to save money – you simply reduce or eliminate your expenses and save as much as you can. I’d argue it’s harder to learn how to spend money, or, perhaps better said, to spend money wisely.

Several months have passed since we started the allowance system. Over that time, we’ve figured out what our “fun” financial priorities really are. To me, a $4 latte from Starbucks is priceless; it helps me relax during what can otherwise be a rather frenzied trip to the grocery store. To my husband, the $10 he spends every month to have breakfast with his coworkers before one of his dreaded weekend shifts puts him in a better frame of mind heading into work. I’ve never regretted the money I’ve spent on charity-related expenses, and I know my husband has never doubted the value of the money he spends on our children.

Reader, what are your financial priorities? What lessons have you learned when it comes to spending money?

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Just like every other aspect of life, in order to be successful with your money, or at least better with it than you have been, you need to have a plan and set some goals. There exists many ways to go about doing this, from setting incremental goals to having certain steps that mark your progress.

Here’s my basic plan as of right now:

·         Step One: Pay off Dodge Dakota

o   Put all extra money towards paying off the Dakota until I owe nothing.

·         Step Two: Pay off Credit Card

o   Take all money that was being applied to the Dodge and use that to pay off the credit card

·         Step Three: Build up 3 months worth of cash savings

o   Transfer all extra money at the end of the month to my Ally bank account until I have 3 months worth of living expenses.

·         Step Four: Look into investments, including Traditional and roth IRAs, Index funds, and other investment vehicles

o   Research each of these investment options and determine what’s best for me

Do you have a plan? It’s not something that has to be big and fancy, just a general idea of what you want to do with your money in what order, and the steps you will take to get there. Of course, the more detailed you get with your plan the better. Below are some tips for sticking with your goals.

1.      Write them down: Every goal is given a fighting chance of seeing completion when written down, as opposed to simply spoken.

2.      Post written goals: Once written down, post them somewhere, such as on the refrigerator or on the dashboard of your car. Repeatedly seeing your goals and being reminded of them will cement them into your brain, as well as making you feel a little more accountable.

3.      Tell everyone what your goals are: If you’re comfortable with doing this, tell any and everyone you come across about your financial plan. This one will keep you really accountable, as people will occasionally ask you how your plan is going, and you’ll want to be able to truthfully tell them that it’s going well.

4.      Develop a mantra: Okay, so it sounds incredibly mystical and magical, but I really do take stock in this idea. When you say something to yourself over and over in your head, you begin to believe it (I guess the mind is pretty impressionable). Something as simple as “I have to save money”, or “stick to the plan”, can really change your attitude, which then in turn changes your behavior.  This concept is related to my earlier post on Neuroplasticity

5.      Keep them realistic: Don’t make it your first goal to simply pay off all your debt, start with an individual item. If the goal is to save money, set incremental goals and keep track of where you’re at. Breaking down your goal into small, manageable chunks can do a lot for your optimism and resilience.

6.      Don’t expect overnight results: In almost everything in life, those who simply last longer and have the most determination and persistence will beat out the better, smarter, bigger guys out there. Just keep working towards your goal, no matter how discouraged you get.