interest only

when sam and i bought our first (and current) house we were wide-eyed, naive newlyweds. we loved the street, the idea of a renaissance movement in my hometown, easy access to the highway and the square. we loved the people that we met when we were shopping the neighborhood. there was so much history and charm.

all of these reasons still hold true for us. we could not ask for better neighbors, we even went on vacation with 2 of them! we brought matilda home from the hospital to this house, we've experienced major loss in this house, we've had hundreds of happy moments in this house. we wouldn't change what this street has meant to us for anything.

we bought at the top of the market in 2006. months in to living on our street the builder went bankrupt, we lost several neighbors to the recession, and we were stuck.

like so many other people in our same situation we fully financed with an 80/20 interest only loan. truth be told we couldn't have afforded the house otherwise at the time and we thought for sure that we would only be here for a few years (read: tiny bungalow). we are already approaching the 5 year adjustable mark for one of the loans. learn from our mistake, just say NO to interest only loans. what can we say other than it seemed like a good idea at the time. we are not alone, all of our neighbors were urged to purchase their homes the same way.

BUT there is hope. i hope.

sam went and met with a financial advisor yesterday who told him three important things:

1. that we should stop putting money in to our savings (we set up an automatic weekly withdrawal which would still be helpful in putting that money aside) and put it towards the principle. we were given the goal of $600 a month. egads, but what doing this does is it allows us to chip away at our loan and ultimately lower our interest that we're paying each month in the process.

2. to raise the percentage in sam's 401k from 10% to 15%. sam's company matches a percentage of his 401k and that's free money folks.

3. we should not take a loss and come to the table with the difference at closing. say we are upside down 50,000 (optimistic) and we paid the difference, in doing so we are ultimately sacrificing millions in the long run of what that money could be doing for us in stocks and/or savings. compounded interest is a serious thing. take this simple math for instance:

this example is from green arrow investments:

"So what exactly is compound interest? Say you have $100. You put that money in a bank that promises you a 5% annual return. After one year you will have $105 ($100 plus the $5 interest). The next year you will once again receive 5% return. However, now that your account has grown by $5, you will be getting 5% return on $105. At the end of the second year you will have $110.25 ($105 plus $5.25 interest). You have gained an additional $0.25 in added interest from the previous year."

so that's the plan. to pay off this loan until we can break even. our hope is that in the next few years the value will rise and we can keep our shirts.