How Being Upside Down in My Mortgage Saved My Finances

My husband and I closed on our first home in February 2007, about seven months shy of the real estate peak. When the bubble burst, we quickly became desperately upside down in our mortgage. We had financed using an 80/20 split between an interest only ARM and a loan modeled after a 30 year fixed but with a balloon payment at the end of a five year term. At first, I didn’t comprehend the severity of the situation, but by the start of 2009 we were $50k underwater, and home values were still decreasing. Add to that car loans, student loans, credit card debt and a household income of $70k – I’m sure it’s no surprise that we began freaking out. We had to make a firm commitment to improve our finances because we ran a serious risk of defaulting on our loan.

It was a difficult time for which I am eternally grateful. This severe situation, instilled tremendous financial discipline in me and my husband. As a team, we managed to right ourselves in our home and, aside from our mortgage, become debt free by the birth of our daughter in 2012. Here is how we did it:

  1. Wrote a household budget that included all living expenses, utilities and mortgage. For our mortgage, we calculated a monthly amount that ensured we met our commitment on the balloon payment. We stuck to this payment schedule.
  2. Discontinued cable and regular nights out. Instead we signed up for Netflix and spent many nights hanging out at friends’ houses. We treated ourselves to dinner out once per month.
  3. Stopped mindless spending. Looking back, I am embarrassed by how many times I roamed Target or TJ Maxx to shop out of boredom. I cringe to think how much time I wasted and how much that money could have grown had compound interest been applied to it. To offset this habit I took up running, put more time in at work and started reading more books.
  4. Lastly we put tax refunds, bonuses and any other “windfall” money toward our debt. Previously we saw unplanned money as an excuse to buy gifts for ourselves. Now I can see that paying off debt and dissolving our financial fears was the greatest gift we gave ourselves.

Four years later, I’m happy to report that we are in much the same situation. We have a car loan and a mortgage. We took out the car loan to take advantage of factory warranty and a 1.9% interest rate. More importantly though, we are at about 50% equity in our home and fired up to pay off our mortgage as quickly as possible. Many people advise to keep a mortgage for tax purposes, but I can think of no greater freedom than to be without debt and to own your home outright. I know a few people in this situation and they walk with a pep in their step that I eagerly desire.

To make this happen, and to take into consideration our growing family, we modified our budget line items which I will share below. We get paid every other Friday, and receive 26 paychecks per year, but we structure our bills and pay them twice per month. This leaves two “free” paychecks per year which we use to pay auto insurance in full every 6 months.  Any remaining money from our “free” checks is split between an extra mortgage payment and investments.

Paycheck 1:

  • Savings & Investments – remember to pay yourselves first!
  • Daycare
  • Groceries
  • Utilities
  • Cable – we re-introduced this when we moved to Colorado, and we are actively discussing cutting it back out. The $120 saved would then get applied to our mortgage
  • Extra mortgage principal payment
  • Charitable donations

Paycheck 2:

  • Mortgage payment with additional principal
  • Daycare
  • Car loan
  • Groceries

You may have noticed a few things missing from this budget – credit card payments, vehicle registration, and gas for our cars. Since we paid off our credit cards, we put that money toward starting an investment account and making extra mortgage payments. As for our annual car registrations, we’ve built liquid savings to a little more than six months’ worth of bills. This gives us the flexibility to pay those annual registrations without having to include them as a line item in our budget. We fuel our vehicles with our personal cash.

Speaking of personal cash, I want to share another important habit we developed. My husband and I still keep our pre-marriage checking accounts. A lot of people tell me they think this is weird and awkward, but I believe it’s important to have some money which does not need to be accounted for to anyone. Our paychecks deposit directly into our personal accounts and then we transfer agreed upon amounts into a shared checking account to pay bills. From here we also make transfers to a shared savings account. This allows us some financial separation. I get to save up cash for “my pretties” as I call them, and it allows him to have his nights out without me giving him the side-eye for his spending.

Lastly, I want to mention a final practice my husband and I put in place. We have an agreement that any purchases outside of recurring expenses which are greater than $250 requires us to tell the other person. This includes money that comes out of our personal accounts. We never veto one another, but it’s a check and balance of sorts. If he wants to spend $300 on a drill, he might do more research before making his selection and telling me about it. Same goes for me if I’m considering a new handbag or kitchen appliance.

Whether you use these tips or not, I hope you capture the essence of this post – financial discipline today sets the stage for financial freedom in the future!

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