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Time for a Debt / Equity Makeover

In the past it has always been said that owning a home represented the model of “The American Dream”. After recent years of challenging economic times that have tested the resolve of nearly every American, many have realized that the real “American Dream” is Financial Freedom.

Today, countless people find themselves stuck in the proverbial rut of debt. With the cost of credit card interest rising and credit of any kind harder to obtain, some have reached the end of their rope. Others may not be in such critical circumstances, but may have mounting debts that are costing more interest than they should. Oftentimes, the monthly payments of poorly structured debts can create significant burdens on a household budget.

Tax Deductible Interest
One of the greatest financial tools is tax deductible mortgage debt. For someone in a 25% marginal federal income tax rate with a 7% state income tax rate, a mortgage with a fixed interest rate of 5% will have an after-tax interest rate of 3.4%. When fighting to get out of debt, it is much easier to make progress paying down a mortgage costing only 3.4% after tax vs. an unsecured credit line at 10%, or even a car loan at 5%.

Compounding Interest
A second financial tool is compounding interest. Take for instance a $100,000 mortgage financed over 30 years at a rate of 5.5% with a monthly payment of $567.79. If payments are made on this loan over 30 years, the total amount paid will be $204,405 (without considering the tax benefits of a mortgage). Although that seems like a lot, the same $100,000 invested over the same time frame earning only a 4% rate of return will provide $331,349! How can one borrow at 5.5% and invest at 4% and make a spread of $126,944? That is the value of compounding interest, which presents a strong argument for not paying off a mortgage.

A Debt Strategy
As a debt and equity adviser, one of the common mistakes I often see is people focusing on paying down theirmortgage before they have paid off their unsecured consumer debts. Personal finance most oftentimes is a reflection of financial habits. Many people in the habit of making extra payments on their mortgage simultaneously carry revolving debts. Although they are making progress on paying down their home loan, the same person often ends upRefinancing their home loan to consolidate consumer debt down the road, effectively erasing the progress they made towards paying down their mortgage. After a few times through this cycle (each time thinking it will be the last), many realize they have developed unhealthy financial habits that need to be addressed.

Monthly Cash Flow
Another concern is monthly cash-flow. Most family’s budgets are structured based upon the stream of one paycheck to the next. With mortgage loans offering lower monthly payments than most other forms of debt, the increased monthly cash-flow can make the difference of financial success or failure.

If you, or someone you know, could use a mortgage review, call my office and schedule a time. A fifteen minute review will help ensure you have a properly structured mortgage and that your debt, cash-flow, and equity objectives are on track. A long-term mortgage strategy is one of the most important financial decisions you will ever make.

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