16 Dec Time for a Home Makeover?
Many Americans today are stuck in the proverbial rut of debt. With the cost of credit card interest rising, and credit harder to obtain, some have reached the end of their rope. Others may not be in such critical circumstances, but may have improperly structured debts that are costing more interest than they should.
One of the greatest financial tools is tax deductable 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 6%
A second financial tool is compounding interest. Take for instance a $100,000 mortgage financed over thirty years at a rate of 5.5% with a monthly payment of $567.79. If payments are made on this loan over thirty 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 someone borrow at 5.5% and invest at 4% and make a spread of $126,944? That is the value of compounding interest.
As a debt and equity advisor, one of the common mistakes I see is people focusing on paying down their mortgagebefore they have paid off their unsecured consumer debts. Personal finance most often times is a reflection of financial habits. Many people get 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, most often times the same person ends upRefinancing their home loan to consolidate consumer debt down the road, erasing the progress they made toward paying down their mortgage. After a few times going through this cycle, each time thinking it will be the last, many realize they have developed unhealthy financial habits that need to be addressed.
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. Do not leave this decision to amateurs.