Mortgage Debt

If you speak to 100 people, chances are you may get 90 different answers.  As consumers and homeowners, we look at our bills differently.  What is the most expensive?  What is the one that nags at you the most?  Let’s break it down:

–  Credit Cards.  Without question, we all feel the burden of credit card debt.  It seems like no matter how hard we try, we simply cannot get off the roller coaster of pay off, max out scenarios.

–  Auto Loans. Auto loans or leases is one bill that many regret.  Possibly the better way to put it, buyer’s remorse.  Today, consumers are more apt to accept an 84-month loan and a car payment upwards of $800 dollars a month.  No doubt this is an expensive bill. 

–  Student Loans. Student loans can be suffocating at times.  Because of the amortization schedule, it is a big monthly payment.  You are staring down the barrel at years paying off $100K worth of debt.

Credit cards are often mistaken for your most costly expense. A day does not go by that you hear about eliminating credit card debt.  You may see interest rates at 12%, 14%, or even 21%.  On the surface that would “feel” like your most expensive monthly bill.

There are many examples we could run through.  However, there is a notable exception: your mortgage.  Often we think of our mortgage in terms of payment and rate.  Rarely do we look at our mortgage as our most expensive monthly bill.  In the end, it truly is.

Mortgages often get lost in just being seen as a payment.  Many people are comfortable on some level with their 30-year or 40-year mortgage.  However, the overall cost is what makes it the most expensive monthly bill.

We are conditioned not to overspend.  We research cars on carfax and other resources.  We use websites to find a low balance transfer option for the lowest cost to our credit cards.  However, we forget a simple exercise to understand our mortgage.  Try this:

 

Mortgage:  $336,000

Term:  30 Years

Rate: 4.5%

Payment: $1651.39 – just principal and interest only.

Take $1651.39 x 360 =  $594,572.40 

 

OR

Mortgage: $336,000

Term: 30 years

Rate: 2.5%

Payment: $1287.78

Take $1278.78 x 360 = $463,600.80

 

First, your monthly payments decrease by almost $400 per month, great savings!  However, overall you are saving almost $132,000.00!  This is why your mortgage is your biggest monthly expense.

As homeowners, it is easy to get caught up in the “here and now” mentality.  Credit cards and student loans.  However, you are better positioned to deal with those payments once you deal with your biggest expense, your mortgage.  Start at the top and work your way backward. The solution both short-term and long-term starts and ends with your mortgage.  

Calculator with wooden house and coins stack and pen on wood table. Property investment and house mortgage financial concept

It seems like an obvious question, however, it is often overlooked.  When considering a refinance are you in a good financial position?  Homeowners often wait until they are in a difficult position to begin making moves.  That could be too late for lenders and yourself!

Smart Money Questions You Should be Asking:

  • Are my credit card balances above 30% of the available credit line?  For example, if you have a $5,000 credit card, do you owe more than $1500.00?  

Smart Money Says it is time to take action.

  • Do you have student loans you are making minimum payments on with more than 5 years remaining?

Smart Money Says it is time to take action.

  • Do you have auto loans in terms of 72 or 84 months?  Are payments becoming unmanageable?

Smart Money Says it is time to take action.

  • Is your business running short on cash flow?  Your receivables are running longer than 90 days?  Considering an expensive loan from Kabbage?

Smart Money Says it is time to take action.

  • Are you hearing rumblings or restructuring at work? The potential loss of time and income in the coming quarter or quarters?

Smart Money Says it is time to take action.

If you fit any of the above scenarios or dozens of other potential financial pitfalls, the time to take action is now, not until the event of the financial situation overwhelms you.

Sit with a professional and talk about your financial situation.  Have an unbiased 3rd party look at your financial picture from a number perspective.  It will be the best smart money move you make!

Managing Debt

If 2020 has taught us anything, even the most “secure” companies and industries are laying people off.  Those left behind regardless of position have been asked to do 2x or 3x as much with the same compensation.  Maybe now, you have the itch to do your own thing!

What is Considered Smart Debt, in Starting a Business?

Debt without question is a natural course of doing business or being an entrepreneur.  Just like our personal lives, there is good debt vs. bad debt.  Let’s break it down:

  1. Credit card balances and cash advances.  No, never.
  2. Kabbage.  This service will lend based on accounts receivable.  High lengthy costs.
  3. Factoring.  Same concept as above, but even more expensive.
  4. Loan against 401k.  No, no, no.  Did we mention NO!
  5. Title loan on your car.  32% interest (varying by state) is a no-win situation.
  6. Borrowing from friends and family.  Only a good idea if you never want to talk with them again.
  7. SBA loan.  Sounds simple on paper.  In reality, it is very difficult to get.  You have to not “need” the loan to get it.

The above are perfect examples, and yet still more exist. Another risk is using the wrong assets to start your business.

Good debt, or smart debt, is about managing  your risk and money.

It is about taking the pressure off your business to have the ability to pay you immediately.  It allows you to have a low-interest rate and a long term that can be tax-deductible.  Good debt?  That is your home.

People would say never put your home on the line!  Well, the reality is your home is always on the line.  Whether you utilize smart debt, good debt, or refinance.  

Here are a couple of ways you can utilize a refinance:

  1. Your ability to pay off all your debt to a single payment.  Savings of a hundred, maybe even a thousand plus per month.
  2. Securing your best asset (your home) to the lowest possible payment with cash out!
  3. Keep your cash in the bank.  Let’s say you have $40,000 in savings and $40,000 in available equity.  Cash is king, keep that in your bank balance.  Borrow $40,000 in the form of a refinance to start and run your business.

Experts are experts.  There is smart risk vs. high risk.  There is smart debt vs. bad debt.  Refinancing your home for rate and term or cash out is the most powerful business tool you have (outside of yourself).  Use good debt smart debt to build your business and your dreams.

mortgage options

The American Dream has been and will always be the joys of homeownership.  Do you remember that feeling walking into your home for the very first time?  Do you remember the sights, smells, and the butterflies?  It is truly a moment in time that stands still for many!  Somewhere along the way, we made the financial side of it just like a Costco!

Costco and Mortgages

Speaking of Costco, did you know they do mortgages?  Yes, now the old joke can be “get 100 rolls of toilet paper and a mortgage along.”  We are not here to say that the people working for the mortgage arm of the company aren’t qualified.  However, this fits the narrative of the industry today for consumers.  

Costco: “One Size Fits All.”

Somewhere along the way over the past 15 years, mortgages have to turn into this one-size-fits-all scenario.  What is the difference in toilet paper or paper towels?  Well, that is the feeling with mortgages.  However, you shouldn’t have a one-size-fits-all solution. This applies to your finances, your retirement, your bills, your college aspirations for family, vacation homes, and investment property.  Can you achieve this in the chips aisle at Costco?  If you could, would you want to?

Costco vs. Customized Solutions

As an avid reader of our site (thank you) you know our feelings on the power of mortgages.  You know our feelings on what the right, customized refinance can do for you today and future.  How a mortgage should be a means to an end a financial tool:

  1. Freeing cash flow to fully fund a 401k or ESOP.
  2. Paying for major purchases such as college tuition or a wedding.
  3. Using the equity in your home to start a business.
  4. Allow you to become an Airbnb investor.
  5. To become 100% debt-free.
  6. Allow you to retire early.
  7. To provide in-home senior care for yourself or spouse.
  8. To help your kids start their adult life debt free.

While we don’t want to pick on Costco, we want people to truly understand the power that you hold in your home and its vehicle, the mortgage.  You need to treat it as such.  Mortgages and the meat section simply don’t mix.  Life decisions should not be taken lightly.  The expertise you require in achieving the ends of your means. That journey begins here.

 

Mortgages

Did you know years ago, there was a practice called a “Mortgage Burning Party?”  This was done typically around the age of retirement to celebrate you now owning your home free and clear.  So it begs the question, should you be mortgage free at retirement?

Refinance & Retirement Age, Quick Look!

First and this fact is undeniable:  Retirement savings on average falls short of needed living expenses by almost 42%.  So does it make sense to be mortgage free with those statistics?  The truth is, in retirement your most powerful financial tool will be your mortgage.  However, let’s be very clear about the strategy.

Are we speaking of a reverse mortgage?  No. Not that those services don’t have their place in financial portfolios for most Americans at retirement or nearing retirement age.  Let’s look at what cash can be used for.

Refinance & Retirement Age Just the Facts!

  • A refinance of your mortgage, with cashout enables you not to have to touch investments, retirement plans, or insurance policies.
  • A new and emerging issue for retired couples is long-term care.  If the pandemic has taught us anything, it would appear that nursing or assisted living facilities are not the alternative we once thought.  In-home care from a provider is the best care possible.
  • Be debt free otherwise.  Eliminating your credit cards, auto loans, costly timeshares, RV’s, secondary properties all makes perfect sense here.  Consolidate it into one payment.
  • Helping family.  The retirement generation is facing financial pressure from their kids, unlike any other generation.  Many are paying their kids’ bills.  A perfect strategy instead of sending them $2000 or $3000 a month would be to pay off their debt, such as their student loans.  It then becomes more manageable for you without having a serious impact on your cashflow.

Times have changed.  Financial models have changed.  Mortgage burning parties are definitely a thing of the past.  Bear in mind that you don’t want financial issues when you pass for your family.  However, you have worked hard your entire life to enjoy this next phase.  A mortgage is a good debt.  Debt that will give you financial freedom, unlike earlier in life.  You now have options.  Use them.  We have specialists standing by to help you understand this phase of your “mortgage life.”  Let’s put a plan together that makes sense to use this asset for the next 5, 10, 20, or even 30 years.

Money management

Have you ever read the book, The Millionaire Next Door?  In short, it talked about the financial habits of those that are millionaires.  Spending habits, financial risks, where they live and what they do to accumulate wealth.  The surprising element from the book is that there are literal millionaires right next door to you and you would never know it!

The Biggest Takeaway from the Book…

It is all about spending tomorrow’s money today.  Sounds simple.  However, in the analysis, it is far more complex when you actually apply it to your life.  Your personal finances.  Your financial plan, if you have one.  Spending tomorrow’s money today really applies to debt and retirement.

The Millionaire Next Door Spending Tomorrow’s Money!

Although our spending habits are of major concern you know the “Keeping up with the Joneses” we need to talk about trading tomorrow’s money today.  Here are some examples of when we spend tomorrow’s money today:

  1. Balances on our credit cards at massive interest rates. 
  2. When we make just the minimum payments on our student loans. 
  3. When we continue to purchase furniture, electronics, and household goods on “1 year same as cash.”
  4. When we are not fully vested in our 401k or retirement plan.
  5. When we lease and purchase vehicles based on their payment amount in terms of 60, 66, or even 72 months.

The Millionaire Next Door Questions!

The value of today’s money and the value of tomorrow’s is not something that is guaranteed.  We live in a historic time.  When mortgage companies, banks, and credit unions are giving away mortgages, you should never be spending tomorrow’s money today.

Here’s the kicker:  You just don’t need another refinance.  You don’t need another plan.  What you need is a purpose with your plan.  Consider this when thinking of spending tomorrow’s money today:

  1. What does my family look like 5, 10, or 15 years from now?
  2. What does my career look like 5, 10, or 15 years from now?
  3. Can I survive a downturn in the economy?
  4. Can I pay for my kid’s college tuition?
  5. What and why are my spending habits the way they are?
  6. What is my mortgage really doing for me?

The Millionaire Next Door Mortgage!

It is this last one that we focus on: What is your mortgage doing for you?  Did it get you in the home?  Yes, but that is only 25% of a mortgage value.  It is a tool, an instrument, to achieve so much more.

You can immediately stop the cycle of spending tomorrow’s money today by having a plan of purpose to your mortgage.  You can refinance your mortgage with specific objectives in mind. We can help you get there.  We will put the plan together, you just bring the purpose.  By setting it, you can then be the Millionaire Next Door!

Good debt vs. Bad debt

Believe it or not, in this health-conscious world we live in, some people overlook certain dietary items.  There is such a thing as good cholesterol vs. bad cholesterol.  Good fat vs. bad fat.  The extreme of one or the other is not healthy in any way. Well, the same can be said for debt!

In regards to debt, too often we misunderstand what is good and what is bad.  Now as a homeowner you have a unique opportunity to “up” your good debt portfolio and shed your bad debt.

Good Debt vs. Bad Debt Does it Matter?

100% yes is the easy answer.  In fact, let’s look at debt and what it means to our credit score first and foremost.  Do you know the standard rule the credit bureaus use in terms of debt usage?

On credit card debt, the answer is 30% of the credit line.  If your usage goes over that amount, your credit score will decrease.  So from a credit score perspective, your usage of credit and what they deem as potentially bad debt can have a huge impact on future purchases and interest rates.  

Examples of Bad Debt

  • Credit Cards: too many and use too much in carrying a balance.  Plus they are NOT tax-deductible.
  • Student Loans: These work as an inexpensive installment loan.  In some cases, they can be tax-deductible, but typically there is no ability to change the payment amount.  They do not have moving interest rates.  High student loans carry a high cost with no alleviation.
  • 1 Year Same as Cash: on the surface you believe you are doing a good thing.  However, the first negative that the company will not tell you is that they are using a finance company to write the loan.  When a company is viewed as a subprime lender, that decreases your score.  You show immediately as having a full balance — and there’s a ding on your credit score. Plus if you don’t pay it off, massive interest has been occurring.  This is also NOT tax-deductible.
  • Auto Loans: everyone has them right?  Yes, but there is more than one way to buy a car.  With auto loans, paying interest even a small interest rate on a depreciating asset (meaning losing value) is a lose/lose proposition.  As a homeowner, you have the ability to buy a car or cars as a cash buyer and get a tax deduction.

These are just a few examples of bad debt.  We could speak for hours on why you should never have a department store credit card, gas card, personal line of credit at the bank, or 100+ other examples.  It is about choosing your debt wisely. 

Examples of Good Debt

You may have noticed that in this section it is one example, not multiple examples.  The truth of the matter is your home is about the ONLY good debt on the market today.  Here is why:

  • First mortgage interest is tax-deductible (always consult your tax professional).
  • Credit bureaus do not ding you for being at your max LTV!  If you can get 80%, 90%, or 100% you will not be penalized by the three bureaus.
  • Taking cash out of your home is nothing like a cash advance.  You will never pay 19% cashout rates like on a credit card.  Plus the interest is tax-deductible.
  • You can reduce monthly expenditure or payments by 25%, 50%, or more by consolidating debt into a lower monthly payment.  That is a good debt.  By consolidating the debt, you have now improved your credit score.

Debt, like our calorie intake, is all about portion control.  Our financial health short term and long term is equally as important as our physical health.  There are numerous areas of bad debt, and so we encourage people to sit with our professionals and let us do a step-by-step assessment of your good debt vs. your bad debt.  You may be amazed at how the savings impact your bottom line.

Everybody has a credit score—several, in fact. These scores derive from your credit history, which is the full account of your borrowing habits. In most cases, the score is a three-digit number between 300 and 850. But what does that number mean? If you’re considering borrowing money or refinancing, it’s important to learn more about credit scores before you compare loans.

The information on your credit report plays a major role in obtaining a loan, insurance rates, the ability to rent an apartment, and a number of other aspects of your life. As such, it’s important to know what’s on the report. If something is inaccurately reported or someone has accessed and used your personal information fraudulently, you want to alert the credit bureau right away. Fortunately, you don’t have to pay to access this information. You can request one free credit report from each of the three major credit reporting agencies every 12 months. Use these steps to get yours.

There are times when opening a new credit card can be quite beneficial to your overall credit score. If you have a mortgage or car loan, but no credit card, applying for a new card will help to diversify your credit history, which is a good thing. Or, if you have been dutifully paying off a high-interest card, opening a new card after a year is also a great way to build credit. But there are times when you should avoid applying for credit. Here are four to consider.