Dominating Our Second Mortgage in 2010

by Kevin on December 16, 2009

When we bought our house in 2007 we made a really dumb financial move. I’m usually a levelheaded guy, and we weren’t of the mindset that home prices always go up.

In other words we weren’t buying a home because we thought prices would go up. We weren’t planning to flip the house and get rich quick.

Nonetheless we made a big financial mistake. We put 5% down on the house, got a traditional 80% first mortgage, and put the remaining 15% on a second mortgage.

Big mistake.

Learning from Financial Mistakes in the Past

I can’t change the past. I can’t go back in time and stop us from buying our home. I can’t prevent us from taking on a second mortgage.

The mistakes you have made in your financial past can’t be undone either. You can change the future.

That’s what this blog is all about: changing your financial future by making changes in the financial present.

Reversing Our Second Mortgage Mistake

Once we settled into our home we decided to wipe out our second mortgage as quickly as possible. We wouldn’t be rash in how we paid off the mortgage — we weren’t going to empty our emergency fund and send every last cent to the mortgage company. Doing so would really put at great financial risk of even the smallest emergency.

We were smart about it. We set up a budget and set up the things that we wanted to save like:

  • paying cash for two new cars in the future
  • saving for retirement in Roth IRAs
  • saving for future children expenses

From that if we had extra money left at the end of the month the money goes toward our second mortgage.

We’ve been blessed and have slowly chipped away at it over the last 2 years. We are on track — assuming our incomes stay the same — to knock it out by the end of 2010.

Avoiding Lifestyle Inflation

We have been really blessed this year. I work in a base plus commission job and our income fluctuates due to that. Thanks to my performance this year I’ve earned myself a nice little raise.

Lifestyle inflation is the term coined for what happens when you make more money and your lifestyle goes up equal to the increase in income.

So if you make $30,000 and get a $3,000 raise… you suddenly find yourself with $3,000 worth of extra spending during the year.

Lifestyle inflation is pretty easy to slip into if you don’t have a budgeting system in place. Many Americans lack this type of system and end up living paycheck to paycheck regardless of how large the paycheck is.

Not me. Not us.

This extra income won’t be going toward our lifestyle. We won’t pick up a car payment in the amount of the raise. We won’t go out and buy new clothes or anything like that. Every last cent is going toward our second mortgage.

Paying Off Our Second Mortgage Fast

Again this is all assuming our current income stays pretty much the same. With my commissions fluctuating there is no guarantee of that. But if that happens, and we add the raise on top of that, we should be able to pay off our mortgage by August 2010.

Words can’t portray how exciting that is to me. It is only 2-4 months faster than we normally would have planned. And the money freed up each month from paying off the second mortgage isn’t enormous.

But just as with the debt snowball every penny counts. We’ll be able to snowball that money, plus the money we have been using to pay off the second mortgage, into other saving categories.

In short we will be able to stop throwing every last cent toward debt. Instead that money will go toward building wealth.

Things are about to get really excited around the No Debt Plan household. I can’t wait. We’re on the road to debt freedom. Are you?

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December 21, 2009 at 2:31 am

{ 5 comments }

Megan December 16, 2009 at 5:43 pm

Good luck – and thank you for starting this blog! I haven’t been reading for very long, but I’ve learned a lot. It’s really opened my eyes.

I made a dumb financial move six years ago – I bought a car with a five-year loan. I knew it was a dumb move about two days after I signed the loan agreement, and I swore to myself every time I wrote a car payment “NEVER again.” Now, DH and I save up for our cars that we’ll need to buy. If we need o get a car loan, we’ll get one with two years, max.

The thing, though, is if you learn these lessons in your 20s, you’ll do well. There are people in their 40s, 50s, and 60s (and older!) who still haven’t learned. And that’s so sad.

Kevin December 16, 2009 at 10:10 pm

Megan, thanks again for stopping by. I love reading comments like yours.

I am bound and determined to be different from my peers… in my 20s, my 30s, and so on. As Dave Ramsey says, normal is broke!

Mrs. Money December 17, 2009 at 11:16 am

We did the EXACT same thing! This year, we ended up consolidating our first and second mortgage though. It is so nice to just have to worry about the one payment now! Good luck paying yours off!

Golfing Girl December 17, 2009 at 2:26 pm

Like you, we did the 5/15/80 mortgage with our current home. However, for us, it was a smart move. We had a house that wasn’t selling in another state but knew we wanted a home here as we were starting our family and found the perfect one at a great price. Getting the 2nd mortgage enabled us to avoid PMI all together. We knocked out that 2nd mortgage in a few short years (as soon as the other house sold). And being accustomed to the 2nd mortgage payment, we simply applied that amount to the first mortgage payment to knock down the balance on the first.

When rates dropped, we refinanced for a 15-year mortgage. The new payments were still lower than the 1st plus 2nd mortgage payments we were used to paying. We have continued to make the original payments (1st plus 2nd) on the 15 year mortgage so we’re hoping to be mortgage free in less than 10 years. FWIW, we have no other debt, have a 6 month EF, are putting 24% into retirement, and have a modest 529 plan for our daughter.

We’re trying to make Dave Ramsey proud!

Ken December 17, 2009 at 7:15 pm

Our road to debt freedom has been rocky since moving into our new home in July 2009. We are still discovering ‘added’ costs of being homeowners. Hopefully early 2010 we’ll have a better handle on what can happen in 2010. We’re open to any and all advice.

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