Coffee heat rising

Mortgages: Is a 30-year mortgage better than a 15-year loan?

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Over at Room Farm, proprietor Chance is offering an article she wrote some time back for Living Almost Large, in which she argues that it’s better to stretch your finances (and by implication, to select a cheaper house) and get a 15-year mortgage than to pay for real estate with a 30-year mortgage. Readers at LAL squawked that it’s impossible to afford a 15-year loan, given the outrageous cost of real estate, and when last seen, Room Farm readers were echoing that and suggesting it’s better to go for 30 years and pay extra toward principal. This strategy gives you an “out” if you run into hard times, in the form of payments-due that are really smaller than what you habitually into the loan.

Let’s consider how affordable a 30-year mortgage really is when compared to a 15-year loan. Real estate has dropped so drastically, it’s now possible to find good housing at prices that allow buyers to consider the shorter repayment term.

As an example, one of my research assistants and her husband just purchased a house in the high-rent district of my part of town. Buying the place out of an estate (it wasn’t a foreclosure—the heirs just wanted to unload it fast), they grabbed a nice house with a pool on a big corner lot amid a cluster of $500,000 homes. Their cost: $225,000.

The dollar difference between payments on 15- and 30-year loans is a lot when you’re talking about the $200,000 range. Let’s say the young people put only 10 grand down and finance $215,000. Right now a 30-year fixed mortgage from our credit union is at 4.625 percent: monthly principal & interest would be $1,105. A 15-year mortgage is at 4.375 percent: $1,631 a month.

However: On the 15-year loan, the first payment covers $847.18 of principal and $783.85 of interest. For the 30-year loan, only $276.74 goes toward principal; the remainder forks over $828.65 in interest.

Three years later, the principal on the 15-year loan is $962.26, and the interest is $668.77. The 30-year loan is applying $316.63 toward principal and charging $788.76 in interest.

How does this look halfway through each loan?

Seven and a half years into the 15-year loan, the buyer would be putting $1171.22 toward principal and only $459.81 into interest. The 30-year loan doesn’t reach its halfway point for 15 years (by then the person with the 15-year mortgage is having a mortgage-burning party!). After 15 years, the buyer with the 30-year loan is still shoveling half the payments into interest: $550.96 pays down principal, and $554.43 goes toward interest.

Let’s say each buyer stays in the house until the mortgage is paid off. At the end of the loan periods, assuming neither buyer has paid extra toward principal, the 15-year loan has cost its purchaser $78,526.24, but the 30-year loan has relieved its buyer of $182,948.10.

For the borrower, interest is money down the toilet. You might as well shred hundred-dollar bills and flush them. Seventy-eight grand is quite enough to fork over for the privilege of paying an astronomical amount to keep a roof over your head!

I would agree with Chance: you’re better off buying a lesser house and straining every muscle and sinew to pay it off in 15 years than you are to diddle away 2.32 times as much interest on the 30-year loan. The alleged savings in taxes are negligible compared to the amount you’re paying on interest over the term of the loan.

If, as some people suggest, you apply an amount equivalent to 10% of the monthly payment to principal, you’re not paying as much interest as you would on the 15-year loan, but neither are you knocking down principal much. Ten percent of our proposed loan payment is only $110: that’s +-$526 short of the amount needed to reduce the 30-year loan to 15 years. Although it is true that the extra payment toward interest would mean that 15 years into the loan principal payments would be higher than interest ($659.96 vs. $445.43), at the end of the loan this buyer has still paid $146,783.23 in interest. That’s almost twice as much she would have paid had she taken out a 15-year loan.

If our buyers can’t afford the higher payment needed to pay their loan in 15 years, maybe they would be wise look for a cheaper house.

Principal and interest figures calculated in Quicken 2006 for Mac.

Perfect retirement day

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Lillian Austin
Lillian Austin

My friend K., who lives in Waddell (halfway to Yuma from here), came into town to visit and to shop at the city’s premier nursery, Baker’s, which at 40th Street and Osborn is halfway to Tucson from her place. It was a very pleasant day: magnificent weather, good company. She bought roses, herbs, and flowers; I bought Lillian Austin, an English rose by David Austin; we perused the show put on by an iris fanciers’ club. We spent several hours socializing and enjoying the garden-like nursery.

After she headed back to the far side of the galaxy, I harvested the first beets of spring out of the garden, fired up the barbecue, defrosted a steak. Braised the beautiful little beets with butter and nutmeg; braised the incredible beet greens in olive oil, garlic, and fennel seed; threw the steak on the grill. Awesome dinner, accompanied by dos fine cervezas (Corona!) with juicy ripe lime from the backyard tree, all of it consumed in the shade of the back patio.

The hour still being late afternoon, Cassie and I circumnavigated the nearby park, also very pleasant on a springtime Saturday.

You know… Soon, every day will be like this!Think of it.

Not having made three, four, five thirty-six-mile round trips to campus in the preceding week, I will think nothing of driving out to Waddell to hang out with my friends. We will not need the excuse of a shopping trip to get together. Driving out to Sun City to visit SDXB surely will feel less onerous, too.

Every day I will be able to garden at my convenience, to download House on Hulu in the middle of the morning, to cook a fine meal, to raise a glass to God’s creation at midafternoon, to stroll around the park whenever the dog and I choose.

Ohhh please, Mr. University President: don’t throw me in that briar patch!
😀

Staying solvent in penury

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At last! The FIRST GLIMMER OF HOPE in the past 24 hours of number-crunching.

If my figures are right, after I’m booted out into the financial snow I can continue to pay toward the Investment House mortgage, continue to live in the outrageous style to which I have become accustomed, and not go broke. The trick is to earn about $13,500 a year, the amount a good part-time job around here pays. I would need to net $938.75 a month and add it to Social Security and 4% of surviving investments to pull this off.

My arithmetic skills are so wobbly that I had to add up a year’s worth of income and outgo to figure this out. Here’s how:

The amount I’ve used to represent monthly expenditures shows the highest monthly utility bills of the year. But the power and water bills drop by more than 50% in the spring and fall. The working figure also includes a $170 payment on the Renovation Loan, which I can easily pay off, dropping that monthly bill to 0.

It occurred to me that with the pending much-reduced income, I could create a “pool” account much like the one I fund now with biweekly paychecks. But because so little money would go into it and the demands of daily costs are so high, the initial “grubstake” would need to be much larger than what I put in to start my present, much better-funded pool.

My current pool account was bankrolled in the amount of one paycheck, which at the time was about $1500 (it’s significantly less now, thanks to the furloughs). What if instead of funding this new “pool” in the amount of a paycheck, I grubstaked it in the amount of an entire year’s net income, $22,500? I have more than half of that laying around the credit union right now, and if I pick up two classes between now and the end of December, I could easily come up with the rest. So, on January 1, I deposit $22,500 into my “pool” checking account, scrounged from present savings and future earnings. That becomes the account’s “cushion.” If unexpected repair bills or the usual astronomical summer utility bills outpace my income, the 22.5 grand will more than take up the slack. In theory, over the winter when bills are much cheaper, I should catch up.

First I added subtracted each month’s typical bills from each month’s balance (the previous month’s balance plus Social Security plus investment income plus a proposed amount of earnings), assuming I netted $1,000 a month from freelance fees or part-time jobs.

Lordie! The result is I live like a queen, never dip into the red, and end up $2,090 to the good at the end of the year.

Well…I don’t exactly live like a queen, but at least I don’t suffer a significant drop in my already modest standard of living. I get to keep putting $200 a month into a fund for unexpected expenses and indulgences, and, best of all, I have no problem paying my share of the Investment House mortgage.

Next, I repeated this 12-step process assuming I earned only $500 a month. This left me $5,265 in the red at year-end. To estimate how much I might need to break even, I divided $5,265 by 12 months and then added it to the $500 monthly extra income. This suggested I would need just under $939 a month to run in the black.

Since my math cannot be trusted, I ran an empirical experiment to see if this was accurate: plugged $939 into the 12-step process. And by golly! This scenario produces a surplus of $3.00 at the end of 12 months.

This is the first time I’ve run a set of figures that make it appear I won’t be taking up residence in a tent city after I’m laid off. With three potential income streams, it should be pretty easy for me to net around $1,000 a month. These activities will force me to get out of the house and interact with some live humans, which can’t be bad. And who knows? It may lay the groundwork for a full-time job after age 66, when the government stops grabbing back your Social Security just because you still have something to contribute to the workplace.
w00t!
$$$$

Résumés on the wind!

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No grass grows under this old lady’s feet, that’s for sure. Just sent out a résumé for a sweet part-time job that would be a great hoot, and e-mailed my book-length curriculum vitae to the English department chair at a nearby community college.

Hey! We’ve only got nine months here to find a new job! Better get to work.

Truth to tell, I believe I could do either of these p/t jobs on the side, while wrapping up the deconstruction of our office. We know I’m capable of teaching the equivalent of four bloated sections of freshman comp for juniors and seniors while supervising an editorial crew; after that, two sections of real freshman comp whose size is limited to normal NCTE guidelines should be a piece of cake.

Far more appealing, though, is the prospect of serving as p/t gofer and sidekick for an editor (and friendly acquaintance) at my favorite local press. This is the outfit that pays me to read detective novels. Mirabilis! Some of the novels I’ve had the privilege to read have been pretty entertaining. If you enjoy detective fiction and thrillers, you should take a look at their booklist. I know I can do this job to a T, and it sure would be easier than teaching freshman comp. Not only that, but once I walk out the door, it probably would provide the income I’ll need to keep from starving.

Yesh. I scared the bejabbers out of myself, along about three in the morning (as you can imagine, I enjoyed about 2 1/2 hours of sleep last night, between 4:30 and 7:00 a.m.), by loading Excel and massaging some figures. Didn’t take long before I was asking myself the Great Dark-of-Night Ontological Question:
What on earth was I thinking when I imagined I could support myself on Social Security and investment proceeds?

Wait! I remember: at the time, we all actually had some investments.

I was horrified to find that what with the 12-fold increase in healthcare premiums that Medicare will represent plus the need to take my share of the Investment House mortgage out of cash flow, my expenses will exceed my present net income, in the highest-paying full-time job I’ve ever held!

To get by, I’ll need to earn an extra $19,000 to $21,000 a year, above and beyond investment returns and Social Security. This will be a trick, since you’re allowed to earn a grandiose $14,000 before Social Security starts docking your benefits.

Not having the mortgage payments wouldn’t help a lot: even without those, Social Security plus proceeds from my total savings (including the money set aside to pay off the Renovation Loan and the savings fund to buy the next car) will not cover my expenses, post-layoff. Check it out:

Projected Expenses

projectedexpenses3-27-09

Projected Net Income from Social Security and Investments

projectedincome3-27-09Oops!

And oops, indeed: take a close look at what it’s going to cost me to live in blissful bumhood. And consider that my net income today is $39,000. I live like an ascetic: don’t travel, don’t own a cell phone, don’t subscribe to cable, satellite, or any other pay-per-view TV, don’t play computer games, rarely eat out, never buy more than the basic clothes and shoes, drive a 10-year-old car, don’t run a tab on the credit card, don’t even go to a freaking picture show! And I use up all but about about $2,000 of that each year. We’re looking at a $4,560 increase in my expenses once I’m on Medicare! Meanwhile, my income drops into the poverty range.

Clearly, I’ll have to work: either get a job or cultivate several income streams. The candidates are part-time teaching, growing The Copyeditor’s Desk, and monetizing Funny about Money.

Community colleges around here pay part-timers about $2,000 a course. The universities now pay about $3,000. Typical income from a freelance business is about $10,000 a year; I would be surprised, rusticated as we are in the middle of the Sonoran Desert, if Tina and I could generate much more than that, apiece. And what would FaM earn? It’s anybody’s guess. So guessy as to be negligible.

Hiring out to teach two courses from the community college district and two from the Great Desert University each year and ramping up our freelance business so that it pays a consistent 10 grand a year will produce something that looks like this:

projectedincomestreamsTwenty thousand extra dollars would do the trick, in theory. But that exceeds the Social Security earnings limitation by $6,000. Have the temerity to earn more than $14,000 a year, and you get your Social Security benefits axed. So, I would have to earn significantly more than 20 grand to end up with enough income to cover the bloated expenses of retirement.

If I’d had the prescience to sell my investments in the spring of 2008, today I would have plenty of money to live on, between SS and investment income. Too bad we didn’t all have crystal balls, eh?

Well, I felt a lot better, anyway, having sent out a couple of job feelers. Even if they come to naught, just doing something other than hunkering in the headlight while waiting to be run down feels like a positive move.

Ax falls but…uhm…bounces?

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Okay, folks. Hang onto your hats.

They gave me NINE. MONTHS’. NOTICE.

That’s right. I’m canned, but in the slowest of slow-mo.

They’re closing my office, but pretty clearly because they’re nervous about the faculty’s response (which will be stentorian), they’re “phasing it out.” They’re going to renew my contract at the start of the fiscal year (July 1), but only for six months. The editorial office is now slated to close in December.

My suspicion that they converted my assistant editor’s job from classified (nonexempt) to service professional (exempt)—behind my back, and without telling her—so that they could more easily can her was dead on. Classified staff must be given first dibs on any openings for jobs comparable to the one they’re being laid off from. This means there’s one job like it coming open and they want someone else to have it.

Dollars to donuts, that little maneuver is illegal: for a contract to be valid, both parties need to sign it, eh? I don’t think you can switch a person from a classified job to a contract job without bothering to let her know, which is what they tried to do. The only reason I found out was that a woman who either wasn’t too bright or wasn’t any too friendly to what they were up to telephoned and let me know. My sidekick now is aware—through me—that her job classification has been changed, but she’s never been offered a contract. Our business manager said that our offer letter isher contract, but the offer letter, as I recall, was for a classified position, not for a service professional’s contract.

I understand that lawsuits against Our Beloved Employer are sprouting like fancy mushrooms in Room Farm’s closet.

For me, this could work out well. Nine months will give me plenty of timeeitherto look for another job (ugh! not bloody likely) or to figure out how to extract a living from several income streams. The possibilities for Bumhood are rife:
– Monetize Funny about Money
–Market and expand The Copyeditor’s Desk
–Put together the two books I have in hand, and sell the things
–Line up a few university or junior-college courses to teach
–Find a part-time job
–Get Social Security started
–Bunch up all my savings and start drawing down 4%, Bush economy be damned

The beauty of this is that my health care insurance is now covered. Nine months’ notice will carry through until the end of December, 2009. I turn 65 in May of 2010: only five months later. The cost of COBRA is being cut, so that the amount I will receive in vacation pay will easily cover five months’ worth, after which I’ll be eligible for Medicare. Six weeks’ worth of vacation pay will cover five months of COBRA and then some: I’ll have cash left over.

Medicare may cost more than the new, reduced COBRA, which could represent a problem. But I’ll deal with that when I get to it.
* * *

A huge typhoon of a windstorm is roaring around outside. Stuff is banging against the exterior walls and thumping down on the roof. Poor little Cassie, who’s scared of wind (she apparently thinks it has something to do with the supernatural), has been locked inside for eight or ten hours, and now she won’t go out long enough to do her Thing.

She was trapped interminably because I left the campus at 6:30, got stuck in perfectly hideous late rush-hour traffic, had to get off the freeway and make my way 15 miles across town on jam-packed surface streets. Went by M’hijito’s house to tell him what’s up; he took me to dinner, so the Cassie wasn’t rescued until after 8:30 at night.

This morning I took my unfortunate client’s corrupted file out to the powerful PC on campus and to my amazement contrived to save it. The computer actually broke into the defunct file! It tried to crash when I hit the corrupted table, but by then I was wise to things and had saved changes. Next time the file opened, I managed to surgically excise the suspect material, and from then on the thing worked OK.

I had to rebuild 2/3 of Author’s twenty-sixtables, some of them very complex. It took hour after hour after endless hour, wrapped around a meeting in which I was told I soon will be out on the street. The upshot of it is that even though I saved the client’s job and will get paid (I hope…), I’ve earned something less than minimum wage for my trouble. Oh well. It’s enough to buy a month and a half worth of groceries, so I’m not going to complain. Much.

A layoff strategy

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On our morning walk, La Maya asked if I have a come-back planned should Her Deanship announce, during this afternoon’s unexpected audience, that the Great Desert University intends to lay me off.

As a matter of fact, I do. Several recessions ago in a galaxy far, far away, I happened to read a magazine article whose author argued that as soon as an employer proposes to lay you off, you should immediately come back with an alternative. The theory was that you can sometimes bargain yourself into a better position, or at least gain paid or partially paid time to search for new work.

Unclear whether this idea remains operative in the more extreme conditions we’re seeing today. But nothing ventured (etc.). So, I have a couple of come-backs:

1. Her Deanship says soooo sorry, we’re laying you off. I say:
Last night on the local PBS news program, a legislator said that a string the size of a rope is attached to the stimulus package Our Beloved Governor has asked the president for. To get the stimulus money, Arizona will have to abrogate and reinstate all the outrageous cutsto higher education(well, as one of the lead budget-cutters, he didn’t use the term “outrageous,” o’course). Therefore, in the next few weeks the university’s budget will be restored and all your programs can proceed as before.

So, why don’t you cut my hours by 50%, temporarily? This would save on benefits and taxes, and half of my gross salary would cover the cost of one research assistantship—including the out-of-state tuition waiver. Then, when things are better, you can reinstate me at 100% FTE.

2. Her Deanship says that will never do! I say:
Rather than yank the College’s support out from under not one, not two, but six scholarly journals (causing bad press for GDU not just locally but nationwide that will ring through the ages like time’s endless echo), why don’t you outsource the preproduction services to me? This will save the university the cost of my salary plus taxes and benefits, remove three research assistantships and a 50% FTE assistant editor’s position, and get the job done at enormous cost savings.

Pull that one off, and The Copyeditor’s Desk has a bread-and-butter client that won’t quit. Tina and I will both be self-employed, which has its disadvantages but also has the advantage that we won’t have to schlep to campus. We can farm the work out to the graduate students on a freelance basis. While we can’t give them research assistantships, we certainly could hire one a semester as an intern, given what we would earn editing six journals plus the other work we’re doing.

Mwa ha ha! No wonder I’m an academic. I was born for this kind of bullshit!

Reviewed the financial strategy I’d already planned for the layoff eventuality. It’s going to be very tight. However, if it’s true that the stimulus package will pick up 60% of COBRA, my back vacation pay will cover COBRA until I’m eligible for Medicare, especially if the university keeps me on until the end of the fiscal year (June 30). Also, $2,400 of unemployment is now tax-free, so that means the pittance Arizona dispenses will be a slightly larger pittance.

So, I guess the main reason I’m not feeling very exercised about this development (besides the fact that I’m tired of thinking about it) is that, although it would be a major inconvenience, if they lay me off my world will not come to an end.