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FinalCall.com News
Business & Money
Leveraging your mortgage to get completely out of debt
By Damon Carr
Updated Feb 17, 2005 - 8:49:00 AM
(FinalCall.com) - In order to free yourself from the bondage of debt, one of three things has to happen. 1. Increase income; 2. Decrease expenses (outgo); or 3. Properly manage the resources that you currently have. The more aggressively you attack these three options, the quicker you will be on the road to financial recovery. Of course, this is nothing new, but it’s easier said than done. We all want to be debt-free with money saved, yet only a few of us are willing to put in the necessary work.
Let’s face it. We accumulate debt in order to maintain a lifestyle we, technically, cannot afford. If you desire a certain lifestyle, the obvious thing to do would be create the necessary money to sustain it. Since we’re not the government and cannot legally print money, there are only three ways average Americans can create money—work, invest and sell something of value.
Houston, we have a problem! The average person is already working two and three jobs to make ends meet. They can’t invest because they have to make payments on debt. Plus, it takes time to receive a predictable, reliable, decent rate of return on an investment. They have limited items of value to sell because the majority of the items they purchased with “debt” are either perishable or depreciate. It’s safe to say that the average person has a hard time generating more money.
As a result, we’ll focus on decreasing expenses and properly managing the resources you currently have.
You’ve heard that a house is a good investment. That’s one of the primary reasons you bought it. Sadly, many of us bought our homes at the wrong time or under the wrong circumstances—i.e. we were broke. We had a limited down payment, if any, no savings or investments, debt and, in some cases, credit issues. This is why you bought your home under the guise of affordable housing, sold on programs that pitched no down payment required, low down payment required, interest-only mortgages, adjustable rates mortgages, balloon note mortgages and/or credit problem—no problem, etc.!
Now that the emotion of being a homeowner has come under control and time has allowed you to mature, you’ve learned that low down payment and no down payment programs create no equity. Interest-only mortgages have an infinite repayment schedule. Adjustable rate mortgages adjust upward. Balloon note mortgages burst. Credit problem—no problem, yet you still have credit problems—even worse.
Then, you learned that life does not always follow your perfectly laid out plan. The car breaks down, the furnace stops working, the roof starts leaking, job layoffs occur, the children grow older and become more expensive to maintain, there’s divorce, medical emergencies, the death of a loved one, etc., and this creates an even further strain on the budget.
Consider these options: A.) You can give up and throw in the towel; B.) You can seek assistance from a consumer credit counseling service; C.) You can file bankruptcy; or D.) You can leverage your mortgage to get you out of debt. I chose option D.
One of the reasons houses are good investments is because they increase in value. You can sell them and create some money. That’s certainly an option. Or you can begin to better manage your resources. You can take advantage of this low interest rate environment, refinance your existing mortgage and deflate the balloon before it bursts, freeze the adjustable rate from adjusting and add some principal reduction to the interest-only payment.
On a debt-to-debt comparison basis, interest rates on mortgages are generally lower than interest rates on other debts, such as a car loan, furniture loans and personal loans. The interest you pay is deductible, while interest on other debts—with the exception of business loans and student loans—are not deductible. Therefore, you can begin to correct your credit problems and/or reduce your outgo by consolidating your bills into a lower monthly payment. This will create the wiggle room you need to get totally out of debt.
Taking advantage of this low interest rate environment, you can refinance and reduce the term of your mortgage, taking it from 30 years to 20, 15 or 10 years, which will save you thousands of dollars in interest. Often, by reducing your interest rate by two percentage points, you can cut your term by 10 years and maintain the same monthly payment.
(Damon Carr is the owner of ACE Financial. He can be reached at (412) 856-1183 or visit his website at www.allcreditexperts.com. For free financial reports, log onto dcarr.thinkhomeloan.com/report.)
