Mortgage Debt Free Life – Avoid These Big Mortgage Mistakes

Mortgage Debt Free Life

Mortgage Debt Free Life – Avoid These Big Mortgage Mistakes

Relying on Rate as the Only Factor

Once an individual obtains financing their focus over the life of the loan moves to rate reduction, first when starting out, when rates are high and dropping. Many mortgage borrowers believe they have managed their mortgage financing extremely well.  They believe they have realized a large amount of interest savings over many rate reductions. However, few are aware they have only extended the term of their mortgage.  In addition, paid more in interest and fees, but are no closer to a mortgage debt free life.

Mortgage Debt Free Life

 

Unfortunately, many refinancers have lost several hundreds of thousands of dollars in interest without even realizing it.  In fact, even though they have reduced their rate a number of times they have only extended the loan term. Furthermore, they owe more today than when they started still, no nearer to achieving a mortgage debt free life.

The rate on a mortgage should not be the most important issue.  As long as it is competitive, the rate does not matter.  Most mortgage loan officers and the financial media hype that rate is the most important thing when obtaining mortgage financing. For this reason, they have pre-programmed financial consumers to think a certain way.  In fact, there are several factors to consider when taking into account the costs and benefits of mortgage loan financing.

With most mortgage financing transactions many other considerations prevail over the interest rate.

The Payment Reduction Game

Many financial professionals push the payment reduction game when offering to refinance your home loan.  They do this in order to pay off debts and reduce your overall payments.  Your bills have been steadily growing and you realize that you are unable to maintain monthly payments easily.

dollar wrapped tightly around rope

Loan professionals may recommend consolidating several high-interest rate bills. Like maxed out credit cards, auto loans, student loans into a brand new thirty-year term loan.  Viola!  Your monthly payments have been reduced by hundreds of dollars. A little later say in a year or two you notice something goes wrong.  So you ask yourself, what happened how did I end up much worse off?

So Why Am I Worse Off?

  • Your credit card accounts remained opened and you spent back up to established limits
  • The car was paid off with a free and clear auto title.  So you go out and buy a new one, taking a beating on the trade-in and absorbing new monthly payments
  •  As a result, your debt and bill payments are now more than ever, two very critical mistakes
  • When you refinanced your mortgage loan you increased the loan term back to 30 years.

In the end, the debt consolidation loan gained very little in the way of reducing debt. It only worsened the problem due to poor spending habits. Leaving you with far less available cash and more debt.  Thus putting you further from the goal of a mortgage debt free life and worry-free in retirement.

Consolidating debt into a mortgage loan using your home equity can be a valuable and powerful strategy. However, if done incorrectly and poorly managed it can have a damaging impact on your financial well being.

A well-thought-out consolidation loan can lead to real debt reduction if followed wisely.  But it must come with good budgeting and closely controlled spending habits. The main goal in every mortgage transaction should always be to finance in a strategic way that minimizes debt. In addition, improves financial strength, and achieves a mortgage debt free life in the least amount of time achievable.

 

Short-term Gain Mindset

In years past, many innocent mortgage loan borrowers purchased or refinanced their homes when property values were high. As a result, LTV (loan to value) ratios far exceeded the property value.  At the time mortgage interest rates were at a record low while property values had exceeded record levels. In addition, unusual high risk loan programs were widely available.

writing with idea light bulb be smart

Many mortgage borrowers attempted to misuse this low-interest rate setting by taking the lowest possible interest rates. They did this by financing their loans using various ARMs (adjustable rate mortgages), payment option ARMs and interest-only payment options.

In the hunt for these lower appealing starter rates, borrowers received a very short-term fixed rate introductory period. Many borrowed against their rising equity to take cash out for short-term reasons.

When the housing market declined, interest rates soared and the HLTV (high loan to value) products disappeared.  Rate adjustments on those ARM products came to light.  The resulting outcome was not a desirable situation. Payments increase and borrowers could no longer afford nor could they find fresh financing to improve their position.

The above account shows us that financing a mortgage loan for short-term gain can have a long-term impact.  The result will more than likely have a devastating impact on your financial health.

Short-Term Oriented Thought Processes

So when you are out searching for financing don’t let these short-term thought processes enter your mind:

  • The most important thing at this time is to lower my payment so I can pay my bills
  • Rates are at an all-time low. So I’ll take out an adjustable rate loan and move to a fixed rate at a later time
  • My only goal is to pay my creditors as soon as possible so they will stop bothering me every day
  • I can only afford a certain amount so my payment can’t go above this amount
  • I must have my dream home right away

bulb drawing signifying idea

When a borrower goes into a mortgage transaction with the above described quick-fix attitude they make expensive errors. In the long run, quite frequently these errors prove to be costly.

Mark Twain was once quoted as saying The lack of money is the root of all evil”.  Those words should ring true with us all when it comes to managing our financings from a short-term view.

Not Truly Understanding Debt

Consumers tend to classify debt. Grouping mortgage debt as one type, installment loans and credit cards as another.  Many consumers treat all personal debt separately from mortgage debt.

Here are some facts that you may not have been aware of when it comes to debt:

  • With a mortgage, it may be possible to use your personal debt to get rid of your other debt faster
  • In many situations, credit card debt is as long-term as mortgage debt
  • Mortgage debt with equity is a good thing. It provides a way to control your payments and change them into a better financial situation
  • Payment control is done by taking high payments on current debt and replace them into a mortgage loan. Providing the means of making cuts in payment, loan term, taxes and perhaps provide cash out

So make sure you know what debt truly is before making any short-term decisions.  It could affect your financial future and your goal of a mortgage debt free life.  The key to managing debt is in knowing how to borrow correctly.

Not Using Your Home as An Asset

Your home is probably the greatest asset you will ever own and most of us underutilize its potential.  It’s like a money market fund or large piggy bank account that most homeowners never make use of.  What your home represents is an asset that you can convert into cash for many useful purposes.

house with yard

The problem is most people never take advantage of the equity in their home until it’s too late.  Home values today may not be here tomorrow. As a result, the equity in your asset could vanish just when you may need it the most.  It’s much like owning common stock. You never realize the cash value of a paper investment like common stock until you sell it.  Your home value works the same way.  By taking out the equity you convert it to cash which provides more options to you for life’s important needs.  Here are just a few:

  • Funding education
  • Retirement
  • New automobile purchase
  • Home repairs and renovations

When using the equity in your home you should think about these simple rules.  Use the equity for conservative investment goals that have been soundly researched.

If you are going to cash out your equity, you should have good reasons for doing so.  In addition, you should seek professional advice before making a borrowing decision.

Make sure the loan is planned correctly. This way you can reduce the principal on your mortgage more quickly to restore equity.  At the same time eliminate your debt altogether and realize a mortgage debt free life.

So in summary, avoid these big mortgage mistakes and start your journey toward realizing a debt and worry-free retirement.

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9 Comments

  1. I’m in the process of getting a mortgage and buying my first property, for me right now having a credit score is imperative and I’d love to not need to worry about a mortgage!
    Some great advice on here, definitely coming back for more.

  2. Fantastic article Patrick. I have just become a home owner myself this year and I will take a lot away from this article.

    I think where a lot of people go wrong is with the desire to have the things they want straight away. To have a debt free life we need to move from the consumer mindset and become savers.

    My goal is to pay off my mortgage as quickly as possible by making over payments every month. Over the length of my mortgage this will save me many thousands of pounds(UK).

    Thanks for the great post.

    • Hi Lee – Great comments.  I also please you enjoyed the article.

      I think you are correct when you point out that people desire expensive things too much too soon.  When that happens people get overextended and find themselves with large amounts of debt.  It’s tough to recover from that.

      Now there is nothing wrong with debt if you use it wisely.  There is good debt and owning a home by financing it is that kind of debt. If you finance a home without overextending yourself then you are avoiding a big mortgage mistake.

      I like your strategy of paying off your mortgage as quickly as possible by making additional payments and applying them to principal.  This is a great approach and will help you build equity faster and as you state, save you thousands of pounds over the life of the loan.

      If you would like to learn more about the advantages of paying a mortgage off early.  Read this post I wrote about paying off your mortgage early the tax benefit myth.  These tax rules may not apply in the UK, however, it does show the savings potential and the power of free cash flow.

      All the best,

      Patrick

  3. Hey Patrick,

    Great, great article! I’ve learned a lot just from the few minutes I spent reading this article. I’ve also bookmarked your site so I can come back to it later.

    I agree with Lee that a person should pay down a little on the principal every payment so that you can save money over time. We recently paid off my wife’s student loans, have bought a house (on a 30 year loan), and have been living frugally so we can avoid more debt. One of the takeaways from your article was that debt can be a good thing. Since we don’t have any other debts than the house, will this affect our credit score in a negative way?

    -Chadimus

    • Hi Chadimus – Congratulations on the purchase of your new house.  It’ awesome what you are doing with your debt management.  Paying down principal over time builds solid equity in your home and gives you more options later on down the road with home equity lines of credit and home equity loans.

      It’s also nice to hear that you have paid off your wife’s student loans.  You might want to consider getting a credit card that both you and your wife can use together with a reasonable credit limit.  Get something that you can earn points on and pay it off every month.  This will help you build a better credit score as creditors like to see that you can manage other credit besides a home loan.

      You might also consider the same approach for consumer loans like auto or home appliances.  Make payments for a few months (around 6-12), in the mean time stash some cash aside and when you have enough payoff the balance.  This will also help you build a solid credit score.

      Glad you enjoyed the article.

      Patrick

      Credit Squared

  4. This is great. I do not own a house yet but have done copious amounts of research to learn all I need to know before I make that large purchase. I appreciate that you are not telling people to take longer term loans so that they can have smaller monthly payments. The interest just will end up biting these people back later. Great read!

    • Hey Austin – Happy to hear you liked the read.

      There is a great deal to consider when making decisions on how to finance a home.  I always point out to people when they first start out that they are going to have mortgage debt, usually lots of it.

      The goal however is to pay it down as fast as possible, so that they can enjoy a mortgage debt free life, especially in retirement.

      One of the biggest mortgage mistakes people make is refinancing their mortgage loan into the same term.  When borrowers do this they get a lower payment, however they extend the term of the loan and end up paying more interest (and fees) over time.

      Refinancing is not always a bad idea, you just need to know your options and make an informed decision.  Here is a link to an article that discusses some of this.

      How To Refinance My Mortgage – 8 Simple Steps To An Effective Strategy

      Hope you get to owning a house soon.

      All the best.

      Patrick

  5. Hi Patrick,

    Thank you for the helpful article. I did get a little confused though… You are saying that the fact that “most people never take advantage of the equity in their home until it’s too late” is a problem.

    I am one of those people. I’ve never taken a home equity loan. So, as I read these words quoted above, in my mind I am getting ready to borrow against the equity to finance a purchase of a new car.

    I continue reading and reaching the following sentence: “If you are going to cash out your equity, you should have good reasons for doing so.”

    Well, I definitely need a new car. I don’t have enough cash to buy it out. Therefore, before I came across your article, I would go and take a car loan. With my good credit record, I hope I’ll find a low interest rate on my new auto-loan.

    Is buying a new car a good reason to cash out my equity? Should I, or should I not consider equity loan instead of an auto-loan? Thank you!

    • Hi Julia.

      Although I have listed it as an option, it would probably not be the highest and best use of your home equity line of credit.

      Automobiles are depreciating assets and don’t really add value to life’s important needs like an education or a home improvement project.

      Having said that, it can be advantageous when you don’t have access to cash or installment credit.  The beauty of having a home equity line of credit in place is that you have a resource to go to when you have other credit or cash flow problems.

      If you have great credit and can negotiate a good rate I’d go the consumer loan route first.  Showing creditors that you can make your installment loan payments on time each month will help your credit score.

      If all else fails, dip into your home equity line of credit to get that much needed new vehicle.

      Best of luck.

      Patrick

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