Paying Extra Principal On Your Mortgage

This topic may not qualify as news for many people, but I met someone recently who had no idea that a home buyer had this option.

Background: Anyone who has a mortgage pays a certain amount towards principal (the loan amount) and a certain amount towards interest. Over the life of the mortgage, the interest amount can end up equalling or surpassing the principal amount. For instance, a $240,000 loan at a 30-year fixed rate of 5% means that you'd be paying $223,000 in interest on top of the $240,000 amount of the loan. Yes, $463,000, not including insurance and taxes. You can plug in your own numbers here: http://www.mortgagecalculator.org/

And banks are smart -- during the first few years of the mortgage, the payments are allocated mainly to interest and not principal. So a strategy of "hey, it's ok, I'll sell the house in a few years to avoid paying all that interest" won't work.

This is why I hate borrowing money, but it usually can't be avoided if you want to buy a house.

However, one way to grow equity in your house and at the same time reduce the amount you pay towards interest is to make occasional payments towards the principal. If you have an extra $1000 here and there, and your checking and savings accounts are adequately funded for a few months, it's a possibility. Call your lender and inquire if there's a pre-payment penalty (and make sure you don't work with anyone who imposes such penalties whenever you buy a house), and if not, look into making the payments online. My lender allows me to do this with no additional costs or fees. And each time I do it, I reduce the amount of interest I'll have to pay the lender -- which I love.

Guardianship provisions: picking a money manager

Tami Cupit Threet was kind enough to comment upon the entry about selecting guardians for one's kids should the parents pass away. She noted that the person who serves as guardian need not serve as financial custodian for them.

If both parents were to pass away, the assets in their estates will pass to their children, but minor children cannot manage this money. Generally, the person who serves as guardian will also serve as trustee for these assets until the children reach the age of majority, which is 18 in nearly every state.

A trustee has a broad range of powers regarding these assets; this person can buy the kids' clothes and books, fund a private school education, invest money in a college fund, start a small stock portfolio in their names, and so on. Or, the trustee could purchase only the most expensive gadgets for the kids, neglect to sock money away for college, or -- in the sad case of a dear friend -- raid the assets in order to buy illegal drugs.

If you know that your pick as guardian will do a bang-up job caring for them, but you also suspect that he will not make sound financial decisions, you can still name this guardian while naming an additional person to be the trustee of the assets. You can also provide directions for the use of the assets: for example, the guardian can only make unapproved purchases under a certain amount; the trustee must use the assets to send the children to a certain school; the trustee must make regular deposits from the estate assets into a college 529 plan; and so on.

Make no mistake, this arrangement could cause some debates between the guardian and the trustee. But it's preferable to allowing someone to squander your children's assets. You can prepare an arrangement that gives you maximum peace of mind.