Reducing Interest Expense Critical to Getting Ahead in Real Estate

The days of 10% appreciation in Charleston are gone for now.  One of the best ways to get ahead in real estate  with your personal residence is to reduce your interest expense, especially if you have a second mortgage at 8-9%.  Let’s say you have a second mortgage for $40,000 at 9%.  That is exactly $300/mo in interest expense.  If you can discipline yourself to spend less, or earn more, or whatever you can do to get rid of  this expense.  If you have credit card debt, it goes without saying that this has to go first. 

One of the things I really like about companies that promote products related to paying off your  mortgage is that they demonstrate and dramatize that a better life is within reach, financially speaking.  When you actually see the numbers right in front of you that you could be debt free in 11 years, it’s a very appealing thought.  It’s true, you can be.  These programs will work especially well for familes with high interest credit card debt, because if you roll $10,000 of credit card debt into a 9% line of credit, and start applying your pay checks to the LOC, and pay your bills out of the LOC, you could be saving several hundred dollars per month.  So, by all means, visit http://www.u1stfinancial.com/ and watch the presentation.  Set up the LOC as they suggest.  And come up with a strategy to pay off your credit cards, vehicle notes, and line of credit.  Then, once you have the LOC paid off, each time you get rid of a payment, take that money and  put it toward your mortgage.  Use the calculator at http://www.bankrate.com/brm/popcalc2.asp , inputting your scenario.  Have a budget and a plan. 

Since I’m sending you to United First’s website, even though I AM suggesting using the LOC to deposit your paycheck and pay your bills, I also wanted to give you a few don’ts:

DON’T buy their program, unless they can prove that they can beat your strategy. 

DON’T roll your car loan into the LOC unless the interest rate on your car loan is higher than that for your LOC.  If they’re very close, you might be able to come out ahead rolling your car note into the LOC because of the tax advantage, since the interest on the Home Equity LOC is tax deductible.  Just make sure you’re calculating the tax advantage correctly. 

DON’T use the LOC to pay down large chunks of the primary mortgage.  Pay off the LOC at the higher interest rate. 

DON’T Set up the LOC unless you have high interest debt, OR you already have a higher interest second mortgage, or HELOC. 

And some more DO’s.

DO Put off the big screen TV, the new car, the big trip, etc until after you’ve reached one of your milestones.  Preferably until after you’ve paid off your LOC.

DO be very careful with your decisions regarding vehicles.  They’re the biggest cash hogs of all.

DO set up a LOC where you can depost your paycheck, and then pay your bills out of the LOC.  With a couple of qualifiers, IF you either already have a second mortgage OR IF you have high interest credit card debt. 

DO find a trusted advisor that can help you come up with a balanced plan for your future financial success. 

DO pay very close attention to your home purchase.  BUY LOW and SELL HIGH. 

DO put off upgrading to a more expensive home.  Selling and moving are also big cash hogs and just a pain in the neck. 

For now, we’re keeping the conversation to your primary residence.  Once you’ve built equity in your home, you can start looking for better ways to leverage your money.  You may want to continue paying down your mortgage, or you way want to use your equity to get into real estate as an investor.  Or you may want to invest in securities.  Or some combination of all.  The important thing to realize is, as long as you’re in debt and you owe more than you’re worth, you are not only working to enrich your employers, you’re also working to enrich you’re lenders.  When your balance sheet tips in the right direction, then your money is working for you. 

Delaying gratification, planning and discipline is the way to a better future.  Please let me know if I can guide you in any way.  And please let us know about your ideas and successes.  If you’ve found something that works for you, let us all know. 

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2 responses to “Reducing Interest Expense Critical to Getting Ahead in Real Estate

  1. Is it wise to pay cash for a car from a LOC that has a lower finance rate right now than the existing bank and credit union finance rates since there is also the advantage of the LOC being tax deductable or is it wiser to go the normal car loan route thru a bank or credit union?

    • Let me answer your question with a question. Why wouldn’t you? The only downside coming out of people using the equity in their home is that they buy things they really don’t need or can’t afford, typically using credit cards, and then use their HELOC to pay them off. What’s worse from a long range standpoint is that they’ve just taken unsecured debt with no collateral and collaterized thier house to this debt.

      Back to your car. If buying a new car is a good decision right now for you, using a line of credit has the advantages you mention and from a purely mathematical standpoint, it is better to use your LOC than a separate loan. Make sure that your new car is not going to put a strain on your finances. Oh, one more thing. Make the payment to the LOC just as if you had a car payment so you’re not extending the car purchase over a longer period of time.

      Your goal should be to be debt free so in the final analysis, make sure your decisions support this goal.

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