Are you in debt? Debt could be a great tool if used in moderation however it could easily get out of control when overused. Sometimes, it’s helpful to be able to extend payments over a period of two or more months, but it’s also smart to pay off your debts as quickly as possible.
To that end, you can pursue alternatives that will lower your interest rates and help you pay off your debt. Needless to say, a lower interest rate on debt opens the door to save money, regardless of how quickly you’ll pay it off. One of my readers was able to do just that. He strongly recommended the three options if you want to get out of debt or significantly lower interest that you pay on mortgage and credit cards. Here are the resources he used to understand his options as well as move forward with a debt-killing decision:
1. Refinancing a mortgage
If you can reduce your mortgage interest rate by one percentage point or more, you can save hundreds of dollars each year. According to consumer finance site Bankrate, even small reductions in your rate can have a huge impact over the life of a 30-year mortgage. To see if refinancing is worthwhile, add the closing costs to the total interest you’ll pay with the new loan, compare to the amount you’re currently paying, and determine whether you’ll have a net savings.
2. Paying off a credit card balance with personal loan
You might be eligible for a personal loan to pay off your credit card balances. Why would you pay credit card interest at 19.99-29.99% per year when you could pay less than 10%? According to personal finance education site LendEDU, personal loan rates are often lower than those on many credit cards, and can be made even lower if you collateralize your personal loan. With some credit cards charging almost 30% per year, it makes sense to take out a personal loan at far less than half that rate and pay off the card.
3. Applying for Reverse Mortgage
Applying for a loan in the typical fashion means repaying the loan a little bit each month. You can avoid having to make monthly payments by getting a reverse mortgage instead. However, even though reverse loan lenders are more lenient about when the loans have to be repaid, there are several reverse mortgage disadvantages. For instance, if you die unexpectedly then the lender can foreclose on your home unless your spouse or other heirs pay the loan balance. It can be quite burdensome for your family to go through the foreclosure process, which means that you should not get a reverse loan if you want to leave your home as an inheritance for your children or other heirs.
Here are two tips to stay out of debt in the future:
1. Throw away the credit cards and use a debit card instead. Don’t get me wrong. I love using credit cards as I can get up to 3% cash back of what I spend however I have seen many people who just cannot control their credit cards habits. Using debit cards will at least limit you to spending only the money you have. If that means waiting to buy a discretionary item, so be it. If an emergency pops up that requires cash, consider a personal loan from an online lender. These loans can usually be arranged quickly and have favorable interest rates. Once the emergency passes, repay the debts as soon as possible.
2. Don’t buy more home than you can comfortably afford. Many smart millennials live at home or rent apartments until they can afford a sizeable down payment on the purchase of a home. Downsizing empty nesters might prefer renting a city dwelling to owning a suburban home. Renting can make a lot of sense for many consumers, so consider the rental alternative before committing to a 15- or 30-year mortgage.
Use debt wisely and pay it off quickly – that’s the secret to a happier financial life.