30-year mortgage. One last payment. What'll prove I'm debt-free?

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Saving for future dream home
2. Setting a budget
3. Forgiving loans to stimulate economy
4. Should we buy a house?
5. Best book of 2011
6. Repaying an old debt
7. Baby life insurance
8. Paying off no-interest loan
9. 30-year mortgage payoff paperwork
10. Vegan to vegetarian

I’ve learned some things and gained some new insights from the Occupy Wall Street movement. They encouraged me to learn more about the issues they’re protesting about and made me reconsider some of my political ideas.

The thing is, I could make the same exact statement about the Tea Party movement.

You can always learn something and grow from anyone, particularly when people congregate under the same banner. Something is making them do this. Why? What makes them so passionate about the idea that they take action? There’s usually something valuable there if you take the time to learn about it instead of just discarding it.

Q1: Saving for future dream home
I was just wondering how you and your family save for your future dream home? Do you put it in a Index fund? If so, at what point would you move it out from that and into a cash account? I remember reading unless my goal is greater than 10 years away, to just keep it as cash. Does that mean 10 years out from your goal you would move it into a savings?
- Fred

For us, we sat down and asked ourselves what needed to be in place for us to move forward with our plans for a dream home. We decided that we needed to be able to pay cash for the land and have our current house completely paid for before we decided to move forward with the plan. Mostly, this is because we’re pretty debt-averse. Ideally, we would like to buy the land with cash, then use the future sale of our house as collateral to build, then put our house onto the market as soon as (or just before) we’re able to move.

Once we had that set in mind, we asked ourselves what financial moves would get us to our goal as quickly as possible. After playing around with several investment and debt calculators, we came to the conclusion that the approach that would lead to success most effectively was a split approach, where we made larger-than-average payments on our mortgage while also contributing a small amount each month to some sort of investment.

Since our timeline for this is a little more than a decade off, we elected to use an index fund for this savings. We are placing half of our savings into Vanguard Total Stock Market Index, which basically indexes most domestic stocks, and half in Vanguard Total International Stock Index, which indexes a wide variety of international stocks.

We re-evaluate these choices every year, watching how the investment grows and adjusting our splitting of our “savings” on an annual basis. As we get closer to the date where we’re able to do this (a date that’s inching earlier and earlier, actually), we’ll move the stock investments into something more conservative that won’t lose value.

Q2: Setting a budget
A friend of mine (she’s 23 and single, part time student with a good paying job and benefits) asked me about budgeting. She said she looks up to my frugal ways and wanted to know if her budget was good percentage wise. I was embarrassed to tell her that other than making sure that housing is no more that 25% of your gross and saving AT LEAST 10% per month, I didn’t know what the “rules” were for percentage of income in the other areas (needs, wants, debt repayment, etc). My personal method is to list my fixed expenses first (of which I include tithe, retirement and regular savings as fixed expenses) and then I try to keep all my other stuff (gas, groceries, entertainment, etc) as low as humanly possible, and then either save the remainder at the end of the month for short term stuff or other things we are working towards (home improvement, vacation). Can you tell me the rule of thumb for budgets? What percentage should be housing, savings, transportation, needs, wants, etc?
- Jill

The problem with sticking to someone else’s recipe for percentages is that they vary widely. The proportion of housing costs, for example, depends heavily on where you live, your housing requirements, and your total salary. For example, a single person making $30,000 a year in New York City is going to have a lot higher percentage of their annual income devoted to housing than a married couple making $120,000 a year in rural Iowa.

The best way to budget is to simply track all of your expenses for a few months, then use that data to calculate the percentages of what you’re actually spending. Then, spend some time thinking about that data. What can you actually cut? What percentages would you like to see elsewhere?

You can categorize all of your spending however you’d like. Just make sure that it’s grouped in ways that make easy sense to you.

Q3: Forgiving loans to stimulate economy
I keep seeing posts on Facebook about asking the government to forgive student loan debts. I’m no economist, but I cannot understand how not repaying the government could prove to be a good idea (though it would benefit me). I’d be interested to read your thoughts on the matter.
- Andy

The idea is that if the government forgave student loan debt, a lot of people under the age of 40 would suddenly have a lot more discretionary income. They would of course then spend that discretionary income, thus stimulating the economy.

Think of it in terms of your situation. If your student loans vanished, you’d probably use that money in other ways. You might buy some things you’ve wanted. You might make a down payment on a house much sooner rather than later.

All of those things would help out the economic recovery. It would be a huge economic boon at the sake of some significant government income over the next few decades. It would increase personal income tax a bit and also increase business revenue a bit too so the government would get to recoup some of it in the form of tax revenues.

Q4: Should we buy a house?
My husband and I are in our early 30′s. We are both from India and have been working in the United States (Texas) for 6 years now. We have no debts and are pretty disciplined about savings. We are on H1b (work) visas and hope to get our Green Card in the next 2 or 3 years.

We have been renting and would like to know if its a good idea to buy a house in the current market? Does it make sense to buy if there is chance that for some reason our GC is not approved and we have to move back to India? Our concern is that we would most probably end up staying and might be wasting money paying rent when we could already be investing in our house. What additional expenses are we looking at and is there anything we need to keep in mind if there is a need to sell in the next 1, 2 or 3 yrs?
- Claire

The best time to buy a house is when you can afford one and it meets your housing needs. If you’re buying a home as a residence, that’s the primary consideration.

Market timing on a home purchase is only a good idea if you’re able to move it easily as an investment. That’s much harder to do if it’s your primary residence. Besides, the future is notoriously difficult to predict. I wouldn’t make a house-buying decision based on the arcane art of market timing.

One point of advice, though. Without a green card, you may find that some lending institutions are hesitant to offer you a mortgage, even if you have a full down payment and good credit, as you might be a risk of just disappearing back into your home country. Don’t let it get you down and shop around.

Q5: Best book of 2011
Your list of your favorite authors was a bit overwhelming. How about just sharing your favorite book so far this year?
- Leslie

I’ll name two books. No, three.

The most enjoyable book I’ve read this year so far, at least in terms of keeping me entertained and keeping me turning the pages, was The Way of Kings by Brandon Sanderson. It’s a fantasy novel that centers around a small handful of really compelling characters, plus Sanderson has a particular gift for making it all come to life.

The most thought-provoking book I’ve read this year so far, in terms of making me reflect on it and altering my way of thinking, was Moonwalking with Einstein by Joshua Foer, which focuses on the neuroscience of memory and how to improve one’s own memory. I’ve also got to give a nod to Born to Run by Christopher McDougall, the best book on running I’ve ever read.

Q6: Repaying an old debt
I have about $6000 in debt on my credit report, most of it over 5 years old. I started saving in order to pay it off but someone mentioned to me and I think you wrote that making a payment will bring the debt current. If in fact the debt falls off after 7 years, is it worth it to may payments on it and in essence bring the debt current or just let it fade away?
- Ryan

In terms of honesty and repaying money you borrowed from someone, of course it’s not the right thing to do.

In terms of strictly looking at your credit report, the debt is probably best left unpaid.

To me, this is really backwards. The current credit score system in this country encourages people to do thedishonest thing if debts have gone unpaid for more than a year or two. I am not a fan of the current way in which credit is evaluated in the United States.

Q7: Baby life insurance
My husband and I just had our first child. We are young newlyweds and are looking for advice on what type of life insurance to buy for our baby and also the easiest way to create a will. Thank you!
- Jill

The easiest way to create a legal will is a service like LegalZoom. They’re perfect for a relatively simple process like creating a basic legal will.

As for buying life insurance for a baby, I generally don’t think it’s a good idea. The purpose of having a life insurance policy is to protect the family in the event of the demise of a breadwinner. The passing of a child doesn’t fall under this category. If it does happen, it’s an expense that you can easily manage and keep moving forward.

If you’re worried about a situation where your child is uninsurable in their twenties or thirties because of a medical condition, these situations are quite rare. Virtually everyone in their twenties or thirties is insurable to at least some level, and most everyone is insurable at a pretty reasonable cost.

Take the money you would have put into life insurance for your baby and apply it to something else, like a college savings plan.

Q8: Paying off no interest loan
I’ve been reading your blog along with several others and all have the same ideas about debt (bad) and savings (good) and how debt can inhibit your ability to save; I’m totally into it. I have no high interest credit card debt as of this month (woot!) and now only have three sources of debt, my mortgage, my wife’s student loan, and a no-interest loan from my parents. They sold me a Toyota Highlander for $9,000 and asked for a monthly payment of $200 until the loan is paid off. I’m about $3,000 into paying it off at this rate. Is there any conceivable benefit to paying it off earlier? To me it seems like free money. Thanks.
- Carl

If you’re looking at it strictly as a debt, there’s no benefit in paying it off early. If you have a zero-interest loan, you’re always better off paying it as slowly as you can.

The catch here is that it’s a loan between family members. A loan between family members is one that’s often made possible because of the strength of a pre-existing relationship. In essence, that relationship is extra collateral on the loan. If you don’t pay that loan off, you can damage the relationship. On the other hand, if you pay that loan off with expedience, you often can strengthen that relationship.

I’m pretty strongly opposed to loans between family members. If I were in your shoes, I’d probably debt snowball this family loan just like the rest of my loans.

Q9: Mortgage payoff paperwork
I’d love to get your advice on a mortgage issue. After much aggressive prepayment of principal, I’ll be sending in my last mortgage check next month. It’s a birthday present to me to pay a 30-year mortgage off in 13 years. Many might call it crazy, but I’m thrilled. So here’s the question:

What papers does the mortgage company need to send me to prove I’ve paid off the mortgage? Are there any documents they (or I) should file with the county where I live in Virginia? I seem to recall my mortgage company sending some notice that you must PAY them to get the payoff papers. That would be outrageous. They’ve made a handsome profit on me, and I’ll fight any additional fees. I thought I’d try the high road first, by calling for the exact payout, sending the check, and then writing them a nice letter asking them to register and send the paid documents to me as soon as possible. Problem is, I’m not sure what to ask for. Please let me know what I must get from them and add info on any optional things it would be nice to get.

You know the saying: a happy customer tells 3-5 friends, and a unhappy customer tells a dozen. Don’t recall the numbers in the saying, but I’m ready to rain a boatload of bad publicity down on them if a responsible customer is ripped off by a bogus money-grubbing policy. Sorry I’m so vehement, but I really want to do this right. I’ll start with a positive letter and ratchet up as needed.
- Alan

The process for this varies from state to state. The usual procedure is that when you pay off a loan in full, the mortgage company then contacts the state, releasing their lien from your home mortgage, at which point the county clerk mails you a copy of your lien-free house title.

If I were you, I’d contact both the mortgage company and the county recorder of deeds to find out what’s next. If you’ve paid off your mortgage, your county’s recorder of deeds should be aware of this and should be able to help you with the next step.

Usually, what will happen is that you’ll have to get a notarized copy of your lien-free deed from the county recorder. That’s legal proof that you own the house free and clear.

Q10: Vegan to vegetarian
I’ve noticed lately that you seem to have switched from being vegan to being vegetarian. What gives?
- Chloe

Last October, I started a vegan diet due to the suggestions of a dietitian who was advising me on some minor medical concerns. This lasted for about nine months, at which point my health was in a better place.

The biggest reason I switched back to vegetarianism is that being vegan – meaning that I eat no meat nor any foods containing animal protein like eggs and cheese – is an incredibly difficult diet with three young children. For a long time, we simply followed their pediatrician’s recommendation that we feed them normally by essentially preparing two different meals each day or by serving them a vegan meal with a heavy protein component to it. This meant lots and lots and lots of beans.

Vegetarianism is simply more flexible, while retaining most of the health-oriented reasons for my original dietary switch. I’m pretty happy with how things are going with it.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.