Cash Back Mortgage Equivalency Calculator
This will convert your cash back rate to an equivalent rate without the cash back. It assumes that the cash back funds are going directly to the mortgage.

Home Purchase Budget Calculator
This will give you a purchase price of your new home based on your personal housing budget, interest rate, down payment and amortization.

With these changes and the All in One Account I will be changing the way we track our progress. I am just going to worry about our total debt and I will start to track our net worth as well. Our goal is to have our balance decrease $5,000 a month. There will be fluctuations due to the banking changes but we are hoping to stay on track. The current balance is $181,276.30 which means we have paid off 43% of our mortgage in 2 years. We are definitely on track. We have also talked about selling our other condo when the tenants leave. That should virtually guarantee the goal is achieved and we will be debt free by July 2013.

We have saved a projected interest amount of $286,596.74. Our current net worth is TBA.

Most adults have some form of debt. Today, I am going to look at some common form of debt and discuss whether it is necessary and how we can reduce the debt we take.

Student Loans – The first type of debt that many folks are likely to incur is from their student loans – prevalent in the US!. With inflation rates of colleges at about the 7% area, it appears that college costs will simply keep rising. It seems like the number ranges from $40,000 to $200,000 if you go to an expensive private college. Unlike other types of loans, student loans cannot be wiped out in bankruptcy.

There is actually nothing wrong with taking on a student loan if you get a job that pays you enough to pay off your loans. Doctors for example have lots of student loans. But when they graduate from medical school, they are likely to have a stable high paying (at least high paying in later years) career. Or if you manage to get into consulting or a Wall Street job after your MBA, your student loans are pretty much taken care of.

However, there are folks who graduate with an degrees with “less earning potential” and with big student loans are the ones who will have trouble with debt overhanging them for a long time.

For folks whose parents have saved for their college education, that is a blessing. But I think future college students (and indeed parents) have to make more informed choices as to their choice of college, the price of admission and their choice of studies. If someone is going to study liberal arts and of a subject that may not have great earnings potential, then it would be quite foolish to go to an expensive college.

Credit Card Debt – After student loans, the next type of debt very likely to happen is credit card debt. Sometimes, it happens in college when a student first applies for a college student credit card. If used responsibly (ie PAY IN FULL), it actually helps a young adult build a credit history. Abuse it like an ATM machine, and you will be saddled with more debt. Of all the types of debt we talk are going to talk about, this one is the easiest to say NO to. Unlike student loans (where you could possibly make a case to say it’s “good debt”, credit card debt can never be justified). The real answer to preventing credit card debt is to understand that when you only pay minimum on your balances, it could take many years to pay off and you end up paying double the amount (due to interest!).

Credit cards are best used as a tool of convenience, and its balance paid in FULL every month. Done this way, a cardholder is free to take advantage of cash back credit cards or gas credit cards to earn rewards and rebates (ie save money).

Car Loans – Car loans is another area many folks take a loan. Again, like credit card debt, this one is easy to avoid Simply save up for a car. If you cannot afford the one you want, get a cheaper model or a second hand car. It simply makes no sense to take on car debt because new cars depreciate when driving out of the dealers lot and even second hand cars depreciate.

Mortgage – Today’s society accept that taking on a mortgage is “good debt”. It is regarded as a form of “savings” as you build up “equity”. It is always assume house prices can “only go up” in “the long run”! (tell that to folks who bought in 2005 and 2006)!

I tend to take a different view on this.I believe that if you really wanted to, you could actually save for a significant portion of the value of the house. The conventional wisdom is to save 20% for a downpayment and take on a 30 year mortgage. In more recent years, folks took on no money down adjustable rate mortgages and are paying for it right now.

While having a mortgage seems to be an accepted today, it was not the case in the 1800s and early 1900s. And having a mortgage normally means having a debt hanging over your head for 30 years! It also means you always have to make sure your income is steady throughout your career, not an easy feat in today’s economy.

A lot of posts on this blog is about paying off the mortgage. My challenge to you is to consider saving much more than the 20% downpayment – target 50%. Having a smaller mortgage and have a shorter mortgage. Consider getting one with on 10 years or 15 years.

Home Equity Line Of Credit – In the 2000s, many folks took out home equity lines of credit. Many used them for home renovations – the train of thought being that it “increases the value of the home”. It is still debt though! Some “abused” it and took out HELOC to take vacations!

Like credit card debt and auto loans, this is one debt where you can really say NO to. Taking on debt simply to do a house renovation is not necessary. Simply save up for it and you do have to take on more credit. Taking a HELOC is simply criminal.

Business Loans – Having business loans for working capital purposes is very common among business owners. The trick to getting a business loan is to make sure you are not personally liable for it. This is easier said than done. For you to get a non-recourse business loan, your business must have established a credit history and you probably have to pay a slightly higher rate for the loan than a recourse loan.

Medical Debt – A lot of bankruptcies are filed because of medical debt. Medical debt is many times an unforeseen event. Having insurance is very important. And now with the Health Care bill, it should make it easier for those with pre-existing conditions. Regardless, having adequate coverage in health insurance is a must to avoid this nasty surprise.

Summary – There are many ways in which we can get into debt. The easiest to avoid are credit card debt, auto loans, home equity line of credit. Student loans are a little trickier. I think before you take on a massive student loan, both the parent and student have to consider whether their future earnings potential justify taking on the amount of student debt. The mortgage is probably going to be the biggest form of debt for most folks. Rather than sticking with the conventional 20% down and taking on a 30 year mortgage, I encourage you to be more ambition and save for a higher downpayment and take on a shorter mortgage so you can pay it off sooner.

While it may be impossible to be totally debt free for some, by taking some intelligent steps with regards to your college education and mortgage and avoiding debt you should avoid, you should have a smaller debt load. This would make it easier to pay off earlier in your life and be debt free.

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.

Saving money by changing lenders was a perk, but not the reason we chose to move our mortgage to National Bank.  National Bank has an All in One Product that we felt would better suit our needs and save us some interest costs.  I rarely recommend products on my blog, but this one impressed us so much that I believe it is worth mentioning.

In the next couple of weeks I will show you how we intend on saving money using this product and how you may be able to as well.  Due to the structure of the account I am also going to have to change the way I track our Mortgage Pay Off Progress.  I am bouncing a couple of things around, but I have not decided exactly how I will track this.  I may add a line for Net Worth to the mix.  I have updated it to reflect the new mortgage amount and interest paid.  To properly reflect the cost of the switch I have included the penalty and the legal fees into the interest costs.  These number will change quite a bit by June or July when we consolidate some accounts and no longer have money idly sitting around.

Original Balance:  $316,000.00 (Jul 2008)

Current Balance:  $238,836.86 (May 2010)

Total Payments:  $108,907.77

Total Interest:  $31,137.38

Projected Interest Saved:  $270K +

When you are first buying a home it is very exciting and very stressful. You will deal with your mortgage rep and lawyer and you will likely run into things that you don’t quite understand. Ensure that you ask questions and have things explained to you until you do understand. Some common questions would be:

• Is the mortgage portable and assumable?
• What are the exact prepayment privileges?  When can prepayments be made and how much?
• Can the mortgage contract be broken without selling the property?
• What is the penalty if the mortgage contract is broken and how is it calculated?
• Can you increase the payment amount and the payment frequency?
• If you are in a variable rate mortgage and want to lock in, what fixed rate do you receive?  Posted less a certain percentage, or is it negotiated?
• If I take a cash back mortgage does the penalty increase and by how much?
• If you accept mortgage life and disability insurance can it be canceled at any time?

Ensure that you ask questions as not asking may cost you in the long run.  Be wary of mortgages with very low rates.  Many are “Value” or “No Frills” mortgages which offer little or no prepayments and you may not be able to break the mortgage contract unless you sell your property.  These mortgages can be very restrictive.

I am still working on my ebook, The Mortgage Reduction Guide which will be a little more specific with some questions that may end up saving you hundreds, or thousands of dollars on your mortgage.  Make sure you ask for ask for a real pony or be left disappointed and possibly with less cash in your pocket!  I love that commercial.

My spouse can buy back some of her pension. Retiring earlier is very inviting. I will continue to keep my RRSPs topped up and my spouse will contribute to a spousal RRSP as we prepare for me to move to 100% self employment in the future. We may even look at TFSAs. Unfortunately the prepayment privileges are a little restrictive compared to my original mortgage. A 10% lump some and up to double every payment will not allow me to fully pay off the mortgage by the end of the 3 year term. If we are ever in a position where we are having money idly sitting around we will discuss ways to use it. At the end of the term we will not have a fixed component to our All in One product and should be able to pay off the balance in a few months.

If you have ever Googled anything like, “pay off your mortgage sooner” or “save money on your mortgage” you have likely come across mortgage acceleration programs or money merge accounts. The premise of most of these systems is that you never have money idling sitting in a chequing or savings account. Your money is always offsetting interest on your debt. This is what we are going to do, but I will pass on any pricey software. This will work to our advantage because at any given time we have between $9,000 – $15,000 sitting in our bank accounts waiting to pay expenses. Our plan is to keep our line of credit with a balance of about $20,000 while the rate is under our mortgage portion interest rate. When prime goes up and our line of credit interest is higher than our mortgage interest we will keep our line of credit balance right around $0.

Switching to National Bank’s All in One product will save us on interest costs and give us the flexibility with our debt and finances. I am looking forward to it.

If I have to send them in excess of $3000 again for the 2010 tax year they will ask me to pay my taxes in quarterly installments. My business income is sporatic so I do not want this to happen. This was an easy fix. I simply supplied my employer with a TD1 Form requesting more tax be taken off of my cheque. Although I will get paid less every month, I will not have the same tax liability in the spring of 2011.

If you work a part time job you may want to consider doing the same. Your part time employer will only be considering your part time income when they take tax off of your cheques. This will likely require you to pay taxes the following spring.

If you want to read more about quarterly installments check out this link from the C.C.R.A.

There are some changed coming in the next couple of months with the way we handle and track our debt and net worth. We are moving our mortgage to National Bank to take advantage of their All in One product. Although we are still focused on paying down our mortgage I also want to tie that in to our net worth. We are still planning for the future and there may be an opportunity to take advantage of the RRSP rules in the future. We are also going to cash dam our rental properties. There will be more on that in the future, but basically it will turn no tax deductible debt into tax deductible debt which is advantageous.

I have learned some things and saved some money in the process of refinancing our mortgage. I will pass these tips on to you in the next few weeks. Our new way of banking should speed up our debt reduction plans.