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.
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.
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.
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
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.
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
- 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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