Killing your loans
Secured loans (aka mortgages) are long term loans - however from my point of view they are loans. Loans are liabilities on you, since you not only has to repay the debt but also pay interest for borrowing the money. You might see lots of ads around for systems that consolidate loans, eradicate loans, eliminate loans. There’s no magic behind those systems. If you research them on the internet you’ll find a big common fact: you have to use the same income you have now.
The most important factor behind eliminating your loans is your will to go out of debt. Some people perceive mortgages as blessings, and fall more in debt to be get the tax deduction. Some feel they are happy and don’t want to think about and move on with their life. Even if you’re happy having loans, you’ve got to know that you’ll be happier debt free. Further more, paying off your mortgage is a big deal, and my school of thought is to avoid loans even if there’s tax deductions behind it.
The different types of loans most us have are: Student loans, credit cards, mortgages, home equity line of credits or home equity loans. The first step is to sort the loans by interest rate. Sort them from the highest rate down to the lowest rate. In order to kill your loans you’ve got to solve this riddle:
Move higher rate loans into lower rate loans, while still being able to maintain the monthly payment AND using every penny you have in cash towards the higher rate loans.
So there are two steps here. If you can move the higher interest rate loans into lower interest rate loans, that would be great. For example part of your home equity line of credit (which might be at 6%) can be moved into a credit card, with 0% for a year and $XX balance transfer fee. You’ve got to do the math here. A. is 6% in a year more, or the balance transfer fee? B. Will you be able to make the minimum payment to the credit card?
Paying twice a month: That’s another way to kill loans. To do that you have first to make a full payment. During half the cycle, you should issue another payment towards the loan. Now some caveats are there. If your note states that any payments you make will first go towards the interest and then towards the principal, it might happen that you’ll be paying only interest. For this to work, you have to be contributing towards the principal twice a month - so you have to outsmart the bank here. The payment has to be made on a date such that when it clears in your account it will contribute towards decreasing the principal.
So you’ve got to plan it correct, and plan it very carefully and be disciplined in applying your plan. It’s not easy, but a lot of people fall in debt and the only way out is to plan well and make the bank work for you - not the reverse.
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