[Nathan]

I am aware of some basic principles of debt elimination:

(1) Consolidate credit card and other debt into a refinanced home mortgage. Not only will the intereste rate and monthly payments be lower, but the mortgage interest is tax deductable (generally), while other kinds of interest (such as a car or credit cards are not). This means that you either can have less taxes deducted from your paycheck, or you will get a bigger tax return. Either way, just make sure that all of the savings that you can goes towards the debt reduction.

(2) With the extra money you have, don't try to split it among the different debts. My understanding is that you should select the debt with the highest intereste rate (usually an 18%+ credit card), make minimum payments on everything else, and then put everything that you can towards that debt. When that debt is paid off take that amount you were paying to the first debt and transfer the full amount to a monthly payment towards the next highest debt.

(3) Ask for a better rate. Call each of your creditors and ask for a better rate. Sometimes you get it. Also, look for the free balance transfer credit cards with no interest for the first 6 months. Just make sure that the money you save applies towards debt reduction.

What other suggestions do you have?

[Becky]

I mostly agree. From the mortgage loan officer perspective, I can tell you that far too many people are in the habit of refi'ing their way out of a mess that they put themselves in time and time again...and that we're too comfortable with a) expecting the values of our homes to rise at unprecedented levels and b) anticipating that rates will be low forever.

Yes, paying off your debt through a mortgage is a tax deduction, and is simple interest, unlike compounding credit card debts that get you nowhere. It's a great solution if you're financially responsible and have the willpower to use it as a tool to reach a goal, rather than a slippery slope into foreclosure.

My concern is that you wouldn't believe how many times a week I talk to a potential borrower who has 60k of credit card debt they want to pay off, and as I look back to the last time they refinanced I see that it was only 1-1/2 to 3 years ago--and that they'd been refi'ing to pay off 60k+ in debt that time too! So in the last 18-36 months they've managed to spend 60k more than their income, not including preplanned installment debt, such as buying a car. It's amazing.

Secondly, for homes in white-hot markets (think Cali, Vegas, Phoenix, etc.) we're all aware of the level of appreciation. The question is this: if the bubble bursts and your home ends up being worth less than what you owe on it, are you going to be prepared to deal with the consequences?

Thirdly, now that your payments are lower overall, are you responsible enough to a) make your payments on time, and b) not charge up new debt? If you default on a credit card it hurts your score and becomes a charge-off or collection; if you don't pay for your car, they repo it; if you don't pay for your house, your home is on the line--it may be foreclosed upon.

The debt that you accrue is your legal and ethical responsibility to pay for. Yes, refinancing is a wonderful way to consolidate debts while interest rates are so low, but I have to advise that we be responsible in doing so.

[mcmama]

I hear you about this Becky, because as a Realtor, I see people trying to do the same thing. They are seduced by the come ons for "consolidate" or for the new home buyers, "no money down!" The no money down loans work great for the short term, or for flipping and speculating. But the folks I see coming into my office wanting no money down (with sellers concession yet) REALLY have no money. And if you havenomoney, you should not own a home. The costs of owning a home go beyond the mortgage and the taxes.
A lot of people come into my office with prequalifications that are not worth the paper they are written on. A lot of these are written so stupidly and so hastily that I can't even use them as a negotiating tool in presenting an offer. The loan officer has not explained the monthly payments to them, they don't have a good grasp of closing costs, they don't understand that in this market sellers want to see you demonstrate that you have a percentage in reserve, and they don't have a solid understanding of the fees involved. They just know that the loan officer said he'd waive the application fee. A lot of times those outfits have add ons to the usual loan origination fee and appraisal. There's a "processing fee". There's a committment fee. There's a whoops we goofed you gotta put up more money fee. The postage fees are inflated. People really need an explanation of ALL the fees involved in applying for a mortgage BEFORE they make the application.
Then, after you apply for the mortgage and are under contract for the house, for goodness sake WAIT to buy the new cars for the two car garage. I had a client who bought the cars before they closed and his credit shot way down and the mortgage did not go through. We had to scramble to get him a new mortgage - and the terms were not as favorable as the first.

[markbarnes19]

Great advice, Nathan. Another excellent technique for lowering debt, while building credit and assets is mortgage reduction. By applying a small, extra amount of money each month to your mortgage principle, you will reduce the loan amount more rapidly, and the value of your biggest asset will also increase more quickly. Note, it's always best to do this yourself, rather than joining a bi-weekly payment plan that lenders love to promote. Just be disciplined, and try to add one month's payment to your principle loan amount by the end of the year.

[niftyneon99]

I have also heard that it is a bad deal to take out a loan on your house to pay off your debts --many times people just keep spending and then they have to borrow more and more.

I am one who actually likes to see my debt disappear, so I don't pay the highest interest rate off first, I pay the smallest amount off first, that way I see I am actually making progress and I am motivated to keep on doing it, instead of just seeing my money go all to interest. I pay the smallest off, then I add that payment to the next largest and do my debt reduction that way.

By doing this we only have our van and house as debt. And I am paying extra on the principle each month for the van (since our house flooded, it would be senseless to pay it off early, because we are going to court to have it taken care of ) Our van loan is 5 years I think, but I am aiming for 3 years or less to have it paid off.

[Marymary]

Originally Posted by markbarnes19

Great advice, Nathan. Another excellent technique for lowering debt, while building credit and assets is mortgage reduction. By applying a small, extra amount of money each month to your mortgage principle, you will reduce the loan amount more rapidly, and the value of your biggest asset will also increase more quickly. Note, it's always best to do this yourself, rather than joining a bi-weekly payment plan that lenders love to promote. Just be disciplined, and try to add one month's payment to your principle loan amount by the end of the year.

IMO, the point Nathan wanted to make was reducing your non deductable high interest debt first, not just your largest one which is usually the mortgage.

I can see at least 5 reasons to put that extra money away in your savings instead towards the equity:
1. Liquidity. One of the reasons why people need to tap into the equity might be lack of money to support current lifestyle or to cover debts. In this case bank may not offer the best rates. Isn't it easier to get some money from your own savings?
2. Costs. In order for that equity to work for you, you need credit line or refi. You'll have to pay the interest even if the origination is free.
3. Compounding. Some advisors will tell you how much money you'll save when finishing with your mtg. before your regular term. Ask them to run a scenario when this extra payments will grow on your own accounts, savings rates now are probably bigger then your mortgage..
4. Control over your own money. You are free to do with these savings whatever you want: projects, extra pension investing, pay credit card debts, all without extra costs.
5. If your income is over a certain limit, having a mortgage and other deductable loans is in your advantage tax wise.

[shloo]

All of you have some great advice. I really do believe it comes down to what you are most comfortable with. I learned the hard way that you can have some expert telling you what you should do about your financial situation, but if you can't sleep at night it isn't worth it. Any decision you make should be reducing your stress, not just replacing it with different stress. The best site I have found that is truly educational is www.investinyourdebt.com

[rey50]

Certainly there is a point and we need to discuss

(moderator: removed spammy link)

[mcmama]

The above post is another tiresome example of Indian spam factories trying to get you to click on their links to God knows where and give up your information.

Don't click on links in posts like these. When you find them, please report them

[archiebess]

Absolutely, the best way to start reducing your debt and to stay out of debt is to get rid of the credit cards and other charge cards. Perhaps keep one for emergencies or to be able to rent a car when needed but all of the others need to be turned into something more useful than debt. For example, take a look at this credit card volcano. Makes a great conversation piece!