I like New Years and fresh starts and resolutions. I make lots of New Year’s resolutions. It’s not that I don’t like the way that I am, it is just that I thrive when I’m challenged. So I set lots of goals. I do lots of the typical “eat less, exercise more and get organized resolutions.” I also resolve to visit new places, learn new skills and have fun. But one of my best resolutions was to get money smart, especially when it comes to debt.I would often buy things simply because they were on sale and because I really couldn’t afford the item, I would put it on a credit card. I regularly carried a balance of several thousand dollars on the credit card, and with interest rates in excess of 12% I guarantee you I paid the banks much more money than I ever saved by shopping sales. One year I started tracking how much of my money was going towards interest and how much was going towards purchases. That’s when I resolved to get out of credit card debt and I’ve not carried a credit card balance in ten years!
As I work with families that want to move up into a larger home or even downsize I’m often surprised at how unaware they are of their equity in their current home. Usually when they pull out a statement to see their mortgage balance, they are surprised and even shocked at how much money they still owe on their home. Lots of first time mortgage holders have never stopped to realize that the bank front loads the interest and very little of their payment goes towards paying down the principle. For example, on a $100,000 loan with an annual interest rate of 5.5% amortized for 30 years, the mortgage holder will pay $6,813.48 a year but only $1,347.12 will come off the balance due during the first year.
Mortgages are not a bad thing as very few people are in a position to pay cash for a home. Today’s current low interest rates make borrowing money much more economical than in years past. But it’s not free!
My challenge to you is while the year is still new to pull out a current mortgage statement and make note of your current balance. Examine your payment. If you have an escrow account, your payment should have three parts: principle, interest and escrow (for taxes and insurance). Understand how much of your payment is going towards the debt. If you are not satisfied with the rate in which you are paying off your mortgage, you can always pay extra principle.
This is also a good exercise if you have credit card debt or auto debt. I do not like sending off money and not getting anything back for it. The knowledge of how much of my hard earned income was going towards interest payments gave me the power and resolve to make better financial decisions. I hope it will help you too.
Happy New Year! If I can help you with any of your real estate needs during 2011, please don’t hesitate to give me a call.
