Living Within Your Means Has Its Rewards

First off, I know I sound like a broken record, but I will repeat myself yet again because it is a key tenet of this blog — financial freedom can be attained by anyone, regardless of income level! “Financial freedom”, folks, is not a two-word synonym for “wealthy.” This is a common misperception among most people that I hope to change over time.

Today I wanted to share with you one particularly terrific example of the type of benefits that are available to those that have achieved financial freedom. Of all the many benefits that financial freedom provides, I wanted to highlight this one in particular because it is a benefit that can be exploited during tough economic times like the ones we are currently experiencing.

Let me first give you a little background information.

I bought my current house in 1997 for $199,000. Over time the value of my home steadily climbed until it peaked at roughly $700,000 in late 2006. Those were heady times, where people were actually buying houses and mistaking them as fail-safe financial investments.

The real trouble came during the refi-boom that accompanied those heady times, when many folks chose to treat their home as a piggy bank to pay for everything from vacations and automobiles, to extravagant home renovations and down payments on vacation homes. Of course, the bubble burst in late 2006 or so and since then home values have plunged as much as 35% or more in some areas. For example, my home value has plunged approximately $200,000 over the past two years.

The bursting of the housing bubble has now left many people owing more on their mortgages than their houses are worth. This can be a real problem for those who lose their ability to keep up with payments due to layoffs or other reasons, or for those with adjustable loans who are expecting an upcoming rate increase that would make their new payment untenable. That is because the traditional solution to those in financial distress and facing certain foreclosure, refinancing, ceases to become an option to those who are upside down on their mortgage.

On the other hand, those who maintained their discipline during the refi-boom and resisted the urge to cash out just to keep up with the Joneses are able to take advantage of the lowest mortgage interest rates of all time. Now, with interest rates at all-time lows over the past week or so, I decided to refinance my current 20-year fixed-rate loan at 5.5% with a payment of just over $1100 into a new 30-year fixed rate loan at 4.625%, bringing my new mortgage payment down to around $640 per month!

I’m really excited about the additional financial freedom my new mortgage will give me! Although I still intend to make enough extra principal payments to have my loan paid off in the next seven to ten years, I will have the flexibility to lower the payment to a very comfortable $640 if I lose my job in this terrible economy or run into other unplanned problems that could result in a shock to our household finances.

The ability to take advantage of the low rates to refinance would never have been possible without sticking to our household budget and strategic plan. That’s not to say that I didn’t get to take some nice vacations, buy an automobile, and make home renovations over the years, because I did, but I always made sure they were paid for in full out of savings I budgeted for as part of my household strategic plan.

In fact, as an additional bonus, the reduction in my monthly mortgage payment by almost $500 effectively extends the cushion of my rainy day fund by an extra month without me adding a penny to the savings account; it will now cover 6 full months of living expenses.

Living within your means has many rewards. Some of the biggest tend to manifest themselves when the times get really tough.

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