One pundit on CNN last February during Black History Month was asked about comments made by a professional athlete about owners and slavery and he cited that "true slavery is debt." An interesting point to be sure but there are all kinds of debt out there ranging from consumer debt like credit cards, payday loans, personal loans, unsecured loans, student loans and more. There is also real estate debt which comes in the form of mortgages, "reverse mortgages" and even the dreaded home equity loan.
Money managers suggest that not all debt is bad. Borrowing money to buy an asset that appreciates in value can be a good investment. On the other hand, borrowing money to live on a day to day basis for any extended period of time is a good way to increase the price of the things you buy by a solid 20 percent per year compounded. That's one heck of a bad value.
Real estate of the most critical category where consumers struggle with loans. Leading Beverly Hills real estate agent, Jade Mills states that on a $1,100,000 mortgage in the current market at 4 percent interest, which is an all time low a consumer will pay $790,564 in total interest over 30 years plus of course the principal of $1,100,000 in addition for a sum total of $1,890,564 in total debt.
Top producing Malibu real estate agent, Chris Cortazzo adds to the argument that if the property increases in value that the nearly $800,000 isn't nearly as much of an issue long term. Additionally, the current tax code in the United States allows for a family or individual to write off the mortgage interest on up to $1,100,000 thus creating a real-world tax shelter for people who can afford such a large loan (or smaller) that reduces the effective debt by upwards of $50,000 per month in debt per year.
Tips To Pay Off Real Estate Debt
- Be willing to refinance based on your family's needs. If .05 percent change in interest rates can save you say $500 per month – do it and pay your old monthly number to pay additional principal.
- Avoid "reverse mortgages" as they eat up the equity that you built into your home thus undoing what over time will likely be a nice investment in your home as well as a good tax write-off.
- Keep your property nicely updated but don't go crazy. Keeping your kitchens and bathrooms modern and your windows, HVAC systems and wiring in good order is smart investments. Dumping $50,000 into a swimming pool needs to be money that you can personally "consume" as in most cases it won't help you get extra value when you sell. Having modern technology like home theater and home automation in your home helps add to the property's salability but be careful what you invest as IT and AV gear can be expensive and don't really help add a lot of value to a home. Here's a whole article discussing the topic at HomeTheaterReview.com
- Keep your credit score high by allowing yourself a good amount of available credit, running it up every once and a while but ALWAYS paying it down to as close to zero as possible. Pay for as much of your monthly expenses as possible including your mortgage (if the bank will let you), utilities and more on a points oriented card but never allow that card to exceed 15 to 20 percent of your total available debt. In a perfect world, this card should be paid off every month.
- Be mindful of your "debt to income ratio" as this is what banks today are basing more and more of their loans on. How much money do you make? How much money do you owe? You might have to pay down your pending consumer debt or student loan debt to lower your ratio in order to get a bigger or better loan but that's well worth it.
- In the event of any one-time payments like an inheritance, a bonus, a sale of an asset – look to use the proceeds to pay down your debt. Paying down long term debt like a mortgage is a guaranteed return on investment. While you could put your money in the stock market – there is no guarantee in your return. In paying down your debt – you know how much you are saving and it can be significant. Buying exotic shoes or taking a two month vacation around the world creates wonderful memories but it leaves you still in debt. Likely there is a compromise in there somewhere that will help you reach your finical goals.
Hopefully, these tips can help you get to a debt free lifestyle. As one prominent Los Angeles attorney says "you don't know freedom until you wake up in the morning and realize that you don't go to work to pay the bank." Long term, being debt-free is a really healthy goal for everybody.