How to Manage Your Debt, Part 5 Print E-mail


If you're in a hurry to pay off your traditional mortgage, keep this strategy in its proper perspective.
If your mortgage is a traditional 30- or 15-year fixed-rate loan, understand that the biggest benefit of paying it off is peace of mind, not financial savings. True, many people derive immense personal satisfaction and contentment from having their houses paid off. This seems to be a holdover from Great Depression era thinking when the motto may have been "don't lose your house to the bank." But many of us have better uses for our cash, especially if we're investing or paying down debt.

Use your after-tax rate to figure out the cost of your mortgage.
If you can deduct your mortgage interest from your taxes, figure out what percentage of interest the deduction saves you. For example, a taxpayer in the 25 percent bracket who benefits by itemizing deductions will pay only 5.25 percent after tax on his 7 percent mortgage. (7% - 25% x 7% = 7% - 1.75% = 5.25%). Likewise, every $1,000 of interest would actually cost only $750, since the IRS doesn't tax the amount of the deductible interest. ($1,000 - 25% x $1,000 = $1,000 - $250 = $750).

If you're shopping for a new mortgage or refinancing an existing one, getting a 30-year fixed-rate loan is often your best choice.
If a 30-year fixed-rate mortgage is available to you, the peace of mind you gain from having a consistent payment likely outweighs any advantages of getting a variable-rate mortgage. This is especially true if you expect to live in the house for many years.

Don't roll your credit card debt into your mortgage, home equity loan, or line of credit.
At the least, wait until your credit cards have been cut up for six months or more before you do. You must learn to live without using credit cards before you refinance the balance. The problem isn't having to pay a high interest rate; it's the whole idea of buying now and paying later. Too often, you risk ending up with a bigger mortgage than before, plus a mountain of consumer debt.

Any time you pay off a loan, continue making the same monthly paymentto yourself.
To build your savings, pay the same monthly amount (from the paid-off loan) to yourself, putting it into your savings account. This won't hurt your lifestyle because you already know how to live without spending the amount of the loan payment on anything new. Saving this way is similar to banking your raises and windfalls instead of spending them as soon as you get them.


 
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