Controlling Your Mortgage

1 November 2010

Strategies to reduce your mortgage

It’s completely possible to shave off a few years off your home loan debt, and even though repaying the full amount seems far away, you’ll be glad when you get to the end of it sooner than you planned.

According to Cannex, you can pay out your 25-year mortgage in 13 years instead.

How?  By maintaining your repayments last year before the interest rates started to tumble. The rates fell from 9.62 percent to 5.76 percent and when you look at the math, the minimum monthly repayments on a $300,000 loan fell from $2646 to $1797 per month. So hold off those holiday plans with the extra $848 and keep putting the money into your mortgage.

Reducing your home loan debt really starts before you sign the dotted line. Make sure you put down at least 20 percent of the property value as a deposit and as tempting as it is, don’t max out your borrowing power. That way you’ll be able to repay a smaller loan off faster.

Payment cycles

Choosing to make weekly or fortnightly payments also makes a difference because instead of 12 monthly mortgage payments a year, you’ll end up paying closer to 13 months. Over a period of 12 years, you’ll be freeing yourself from one year of repayments or more.

Short-term debt versus long-term debt

The other thing to keep in mind of course is to avoid overspending in other areas. So while an extra $50 a week going toward your home loan debt will help you repay your loan faster, there really isn’t any point in doing so if you end up having to pull out your credit card at the supermarket to cover the midweek groceries. Especially since credit card interest rates are much higher.If your credit card does get out of hand however, it might be worth incorporating your credit card debt into your home loan. While doing that temporarily increases your home loan debt, you’ll end up saving a fortune in credit card interest and be able to pour that money into your mortgage instead.

Refinancing your mortgage

Think twice before you consider refinancing in the first five years of your loan. Lower interest rates dangled in front of you may be sexy, but exits are a costly exercise if you make the switch in those early days. So wait it out, there are always good refinancing deals to be had.

Strategies to get in control of your debts

Do you remember when it was difficult to get a credit card? Well, these days it’s not too hard at all. All the major retail stores have them and with on-the-spot financing, making it easier than ever to load up your wallet with plastic. And if that’s not enough, you needn’t look further than your mailbox to find credit applications or even pre-approved credit cards and loans. All this readily available credit makes spending more money than you have all that much easier.

Here are a few useful steps to follow to get out of the black hole of credit card debt a little bit faster:

  1. Consolidate. You may have heard this time and again but it is the most practical means of reducing high-interest credit card debt. Consolidating means taking all your debts and combining them into one low interest loan with a single monthly payment. This is the first step to take if your monthly debt servicing is higher than your monthly income. Be aware, however, of finance companies offering consolidation loans – these may sometimes be as bad or worse than the interest you are currently paying. You may end up combining three mid-interest credit cards into one high-interest loan. Be sure to do the math. It’s best to shop at your bank for a consolidation loan instead. If you have a mortgage, you can use your renewal time as an opportunity to leverage your home’s equity and consolidate your loans into your mortgage. This is the best way to get the lowest finance rate possible. Your mortgage payment will only increase slightly (depending on the amount of debt you have), but you will no longer be paying multiple loan and credit card payments. Use the money you save to pay down your mortgage faster.
  2. >Cut up your credit cards. The biggest credit mistake anyone can make is to consolidate all their credit card debts, and then still hang on to the credit cards. By keeping the credit cards, the available credit is once again at your finger tips making it all too easy to shop, shop, shop. Keep only the lowest interest, no fee credit card for emergency purposes if you feel you need to. Avoid the temptation to use it frivolously.
  3. Avoid retail financing. Whether it’s a retail credit card or a ‘don’t pay until the next ice age’ gimmick, avoid retail credit like the plague. It’s not only the highest interest rate in the business, but you need to really read the fine print. For instance, if you buy something and don’t have to pay until some point in the future, be aware that interest may be accumulating daily while you are sitting at home on that big comfy leather sofa watching your 50″ plasma TV. If you don’t pay them out by the due date, you’ll have one hefty interest payment that may have you paying for your goods three times over.
  4. Use only good credit. There’s good credit and bad credit. For example, a mortgage, car loan, and personal line of credit are all good credit. A department store credit card with a 32% interest rate is bad credit. Stay away from bad credit. You may have been told that you can establish good credit by using credit cards and paying the balance on time, but if you are not careful that strategy could also backfire
  5. Skip Christmas spending. Or any other event in your life that requires you to spend more than you normally would otherwise. Christmas is one of the biggest causes of extra spending that usually ends up on credit. Vacationing is another one.
  6. Return what you shouldn’t have bought in the first place. Take a look at your recent spending and see if there is anything that you bought that you haven’t used and can still return. From that point forward, always follow the 24 hour rule: when you see something you want to buy, give yourself 24 hours before you buy it – chances are you won’t.
  7. Reduce your monthly expenses. There are countless ways to spend less money. Start by listing all the things you spend money on in a month and determine which ones you can do without, even if it’s just for a short period of time. Cancel the newspaper subscription, quit smoking/drinking/going to the movies, don’t eat out, go on a diet, cancel the cable, eliminate a few extra phone features you never use, don’t buy name-brand foods, drive less, and so on. Also, avoid going to the store as much as possible and when you do, avoid buying things you really don’t need. Set yourself a no-spending goal for a set period of time and stick to it.
  8. Make more money. Get a second or third job – just for a while. If that doesn’t work for you because of family or other obligations, try to at least get casual work that you can do whenever time permits. For instance, deliver pizza on the weekends and deposit your earnings and tips directly into you credit cards at the end of the night. If you can’t work more, see what you have around the house that you can sell to help pay off your debt. Have a yard sale or throw a few collectibles up on eBay.
  9. Downsize. If you happen to have a little or a lot of equity in your home, downsizing could mean a tax-free windfall. If you sell your existing home and move into a house that costs less (not necessarily a lesser home), you can pay off debt and maybe even have a little extra spending money in the end.
  10. Pay more than just the minimum payment. If you pay only the monthly minimum payment on your credit cards, then your great grandchildren could be inheriting your high-interest debt. Pay as much as you can, as soon as you can, and as often as you can.
  11. Talk to a credit counselor. If you are really having trouble getting out of debt either because you are unable to get a consolidation loan or if you just can’t get your spending under control for personal reasons, consult a professional. Credit counselors will negotiate better rates and terms of payment with your creditors and will help guide you with your finances.

Don’t feel alone in your quest for freedom from debt. There are many, many more out there like you. Even though someone is driving a nice car and lives in a nice house, that doesn’t mean they had the money to buy it. It just means they have further to go than you before they are free.

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