Sunday, January 02, 2011
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!