After the recent disasters we've seen with the adjustable-rate deals that have gotten so many people in trouble, many homeowners and new buyers are turning to 30-year fixed mortgages. But take a look at the closing paperwork for your mortgage. (If you don't already own a home, ask a good friend or family member for theirs.) Near the top you'll find two numbers: the amount of the loan and the amount to be paid to the lender at the end of three decades. For example, you buy a home for $250,000 with a 30-year mortgage at 8 percent, and you'll wind up paying about $660,000. Where did the extra $410,000 in interest go? It went right into your lender's pocket.
The Fix: First thing, if you plan to be in your home for more than five years and you have an adjustable-rate loan, then you should refinance now. Rates are at historic lows as I write this in July 2011—but they won't last forever. Second, if you can manage the higher monthly payments, signing up for a 15-year fixed mortgage is the way to go—no question. Not only will you be free of your mortgage debt sooner, but you will save a lot of money in the process.
If a 15-year mortgage is just too expensive, I recommend you change the way you tackle your 30-year fixed-rate mortgage. Instead of making one payment per month, send half your monthly payment every two weeks. In a 52-week year, you'll end up making 26 half payments—essentially one extra mortgage payment a year. It may not seem like a lot, but the impact of that one change is awesome: Depending on your interest rate, you could pay off your mortgage 5 to 10 years early and save more than $100,000!
Mistake #4: Letting Existing Lines of Credit Close or Closing Them Yourself
Most of us have figured out that credit card debt can be a slippery slope. You may have even made the decision to stop using one or more of your cards and stowed them away. That may have worked in prior years, but in the aftermath of the credit crunch, the credit card industry has gotten much stricter about inactive accounts—and they can decide to close them. This can hurt your credit score, since it reduces the average age of your credit accounts. If you close old accounts yourself, you're shortening your credit history and reducing your total credit—neither of which is good for your score. Also, closing an old account will not remove a bad payment record from your report. Closed accounts are listed right along with active ones.
The Fix: For now, hang on to your old accounts and start putting at least one charge on each of them every month. But please note: This strategy depends on being vigilant with your credit cards, paying the full balance and not missing any payments. This will keep your account open, which in turn will keep your credit history nice and long—and ultimately raise your credit score. (If you have to close an account, close a relatively new one.)
Mistake #5: Giving Up on Your Retirement Plan
Of all the terrible ways that the Wall Street meltdown affected our lives, one of the most painful involves our retirement savings. Although more than 50 million Americans are putting aside money for retirement in one way or another, most people's 401(k) accounts and individual retirement arrangements took a major hit over the last few years—some investors lost close to a third of the value of their retirement plan.
Nearly four out of 10 workers who responded to a 2009 AARP survey said that they'd cut back the amount of contributions to their accounts. Even worse, one in five workers over the age of 45 said they had cut out their retirement contributions entirely.
The Fix: Given the economic surge that usually follows a deep recession, you couldn't pick a better time than today to recommit to a wealthy future by saving and investing for retirement. If your employer offers a 401(k) or similar retirement plan, make sure that you're signed up and contributing. If you don't have a 401(k) at work, then you should open your own IRA. You can use websites like Morningstar.com to compare your investments' performance to others in the same asset class. If you do not feel comfortable making these decisions yourself, get some help from a qualified financial professional. (Start with your employer; they might offer a free or fee-based advisory service.) I also suggest you try increasing your retirement contributions today; if you don't feel the pinch, raise them some more. A great strategy is to start by saving a minimum of 5 percent—or the amount up to which your employer will match—and then gradually increase it to at least 10 percent. Your goal is to reach the maximum contribution allowed each year and to make sure you're paying yourself first!