I want to caution you that you do not need to purchase any software to set up this process and most of the time this software will not pay down your debt as efficiently as possible and may hurt your progress in the long run.

For nearly two years we have been making mortgage prepayments when we have had excess cash in our bank accounts.  This made an incredible difference in the projected interest we would pay and the balance itself.   Our mortgage balance was approximately $239K after  22 months of prepayments.  If we did not make any prepayments our balance would be approximately $311K.  Our prepayments made a huge difference.

Every month for the past 22 months we would sit down and work out an amount we were able to prepay against the mortgage.  We had to keep track of when money was coming in and when bills had to be paid in order to prepay the right amount without going into overdraft.  Although it was very effective it was not the most efficient way to use our time.

We were able to hit a “sweet spot” when rates were increasing and refinanced our mortgage.  The penalty and legal fees were absorbed by the interest savings so we switched to National Bank’s “All in One Mortgage”.  In my opinion, this is the perfect mortgage product.  It enables you to separate the line of credit portion into different sub accounts and use each as a chequing account.  All of our income goes into one account and all of our bills come out of it.  The line of credit is re-advance-able.  When we make a mortgage payment the principle portion becomes available in the line of credit.  The beauty of this is we no longer have to plan around our income and expenses.  The money is always available.

Currently we are set up like this, $310K All In One Limit, -$189K in a fixed portion at 3.65%, -$43,726.62 in our main line of credit account which receives all of our income and pays all of our bills at 3.1%, -$832.25 in a second line of credit account to cash dam our rental property (explanation post to follow) at 3.1% and $86,441.13 available overall in the lines of credit.

The goal is to not have any money idly sitting around but have every penny we bring in offset mortgage interest.  The interest rate on the line of credit accounts will fluctuate with the Prime Rate.  As it increases we will pay down our main line of credit account so when our line of credit interest rate is above our mortgage rate at 3.65% we will no longer carry a balance.  It would be ideal  to have that account always at a $0.00 balance but with income and bills coming in and out that is not practical.  The balance will likely fluctuate $1,000 either way.

This account has allowed us to use our money to offset as much interest as possible and has simplified our financial lives.  All of our bills, utility, credit cards, taxes, phone, etc are automatically debited from our line of credit account.  Well, all except for the AMEX, they won’t do direct debit without a personalized void cheque.  We will work on that later.  We no longer have to sit down and work things out on a monthly basis.   Our finances are fully automated!

Our total debt currently is $233,558.12 which must decrease by $6312 a month in order to be debt free by July 2013  which is the goal.  Although that is a lofty goal, we are waiting for the proceeds from the sale of one rental property and may sell the other next year if the tenants do not want to stay.

The only possible down fall with this is not properly managing our spending.  We will have to monitor it and keep it in check.  That is after our tropical vacation.

One such resource is the online mortgage calculator. These calculators generally explain two things about your mortgage if you refinance. Firstly, how much you will save over the life of your mortgage, and secondly, how much you will save monthly.

One such calculator appeared on three different sites that claimed you could save over $78,0000 in interest on your $300,000 mortgage if you refinanced it from 6% to 4.25%. The payments were actually lowered by $283 a month.  This appears to be an incredible savings until you look at all of the facts. A closer look will reveal that these calculators are very misleading.  The calculator on all three sites asks you to input the penalty amount and closing costs that will be incurred when refinancing. Two of the sites go on to explain that these numbers are not used in the calculations and one fails to mention this fact completely.

When you sign your mortgage it is a contract for the term you select.  The lender expects to get that rate of interest from you during the entire term.  If you break the contract before the end of the term the bank will penalize you for any interest that they have lost. The greater of the Interest Rate Differential or three months interest is generally charged when you break your mortgage contract.  The IRD is normally calculated by determining the difference between a lender’s posted rate at the time your mortgage was signed, and the lender’s posted rate for a term closest to the time remaining in your term.  Lenders charge this penalty to ensure they are not losing money if you refinance your mortgage before the end of your term.  Although this IRD calculation is common practice among lenders polices do vary.  You should always contact your lender to get an exact penalty amount.

Another flaw with these online calculators and the numbers they project is that they are basing your interest saved on the full amortization of the mortgage.  This is deceptive. In the example used above, you will still need to renegotiate your current 6% mortgage at the end of its  term, just like you will still need to renegotiate the new 4.25% mortgage at the end of its term.  These calculators assume that you will always renew at the same rate which is highly improbable.  You will not save money refinancing your mortgage this way.  If you have a need to lower your monthly mortgage payment you can do so by refinancing, but you will not come out ahead.  You would be far better off consolidating your high interest debt during the refinancing of your mortgage.  It is then possible to substantially lower your total cost of borrowing.

If you have equity in your home refinancing to pay off high interest debt could very well save you thousands of dollars. There are also plenty of advertisements showing that consolidating your debts can save you a great deal of money every month.  Sounds like a good idea, right?  Not so fast.  Ensure your banker, or broker is fully explaining the savings found by refinancing.  Work with a mortgage professional who can analyze your debt and take the current balances, interest rates and payments of all of your debts and project what your total debt will be in 3 or 5 years with your current mortgage.  Compare this to refinancing and paying off all of your high interest debt.  There are four options to look at:

1.  Increase your monthly cash flow by having your current projected balance and your refinance balance the same after a 3 or 5 year term  This will leave you with the same amount of debt, but a lower monthly payment.

2.  Lower your total debt by keeping your monthly payment commitment the same with your mortgage and all other debt payments included.  This will not free up any cash on a monthly basis but your interest savings at the end of your 3 or 5 year term will be significant.

3.  A combination of increasing your monthly cash flow and reduction of the total amount owed at the end of the 5 year term.  This will provide some instant gratification with lower monthly payments while reducing the total amount owed at the end of your term.

4.  Extending your amortization period to the maximum 35 years to lower your monthly payment as much as possible.  This should only be done when lower monthly payments are absolutely necessary as the interest costs will be significant.

Everyone has unique financial situations, short term and long term goals.  Find a mortgage professional that you are comfortable with and fully explain your short term and long term goals.  Your mortgage professional will be able to fully explain the outcome of refinancing your mortgage and find a mortgage that meets all of your needs.  If you do not fully understand how your mortgage professional is arriving at any amounts ask him or her to explain in detail.  If you still do not understand, ask again.  Hopefully they are not using an online calculator.

For 2010 I am going to stop purchasing books and rely on the public library.  The last time I renewed my card is was around $16 which is much better than the $300 I spend every year on books.  I will still purchase books that I feel I may to refer to quite often, but I am definitely going to cut back my spending in this area.  I am also going to avoid buying books from a book store if I am able to purchase them online and have them delivered for less that the book store cost.

Estimated yearly savings: $200

Total yearly savings for implemented strategies: $2,240

Total savings missed for strategies not implemented: $322

Difference: $1,918

If you have a question about the $$$ savings you may experience by refinancing your mortgage for a lower rate, consolidating debt or are comparing different offers from lenders please feel free to email me at mortgagemath@debtfreeby43.com . You will receive a reply within 48 hours.  Your email address will only be used to reply to your question and will not be added to any mailing lists now or in the future!

I have set up this email address to send an auto response that will include a link to make a donation to Debt Free by 43.  Although a donation is required to have your question answered there is no minimum donation.  Simply donate what you feel an answer to your question is worth.  It is that easy!

I won’t get rich, but it is my hope that I can generate  some cash every month to take my better half out for a nice dinner.  That may decrease the number of times she refers to herself as an “Excel widow.”  I do love working with the numbers.  If you need some help please feel free to email me at the address above.  I appreciate your continued support.

Estimated yearly savings: $84

Total yearly savings for implemented strategies: $2,040

Total savings missed for strategies not implemented: $322

Difference: $1,718

I am not going to push this on the rest of the family as it is a personal choice I am making and I don’t feel it would be fair for me to ask them to make the sacrifice.  After a beer or two tonight I will begin fresh tomorrow morning.

Estimated yearly savings: $1,500

Total yearly savings for implemented strategies: $2,040

Total savings missed for strategies not implemented: $240

Difference: $1,800

Estimated yearly savings: $240

Total yearly savings for implemented strategies: $540

Total savings missed for strategies not implemented: $240

Difference: $300

Over the last couple of days I have moved my blog to Go Daddy and greatly reduced my costs. Their hosting service better suits my current needs, knowledge and traffic levels. This change worked out to significant savings for us.

Estimated yearly savings: $540

Total yearly savings for implemented strategies: $540

Total savings missed for strategies not implemented: $0

We are going to estimate what each strategy saves us over a year and post running totals what we have saved. We are also going to post a running total of what we could have saved, but didn’t, because we chose not to implement a strategy.

We look forward to sharing our small savings with you and are hoping that the sum of them will add up to a large savings over the year.

Your comments and suggestions are always welcome.