Debt is the one thing that can turn an otherwise happy person into a miserable wreck. We often wonder how we get ourselves into such a mess. The terms can often be complicated, the rates can fluctuate, how much is going to interest, how much to the actual debt, all these things can make a simple purchase a nightmare.
Here we discuss a few tips that can help you turn a nightmare into a more pleasant experience.
First off, evaluate your finances on your terms. When attempting to get a long term loan for a vehicle or a house or any other large purchase, there are certain minimum requirements that you must meet to qualify. Those requirements are usually determined by your income after your major expenses come out. They usually give you figure of say 30% of your monthly income should go towards your house payment. Well, that would be wonderful number if you had a great job and knew there was no way anything bad could happen and there were no other expenses. Often what the finance companies neglect to tell people though is that there are a number of other expenses that go along with financing a new purchase. Insurance is a big deal in most cases, as is maintenance, and lets not forget updating anything.
Before you rush off to finance a new car, figure out a number you are comfortable with and stick to it. If it means waiting a couple months to save or finding an extra source of income, then do it. The last thing you want is to be over budget and end up in the worst case scenario of being foreclosed on or having your belongings repossessed.
Next, you have to think about how long you want to be making those outrageous payments. Once you've taken finances into account, you have to take personal situations into account, when do you want things to pay off, will you be 80 making your last mortgage payment. Set the terms of your loan agreement realistically, if you know you're going to be moving in five years, better pay that car off before then. Things like college funds and retirement also have to be taken into account. It is much more difficult to retire with a lot of debt and a lot less income.
Now, on to interest rates. Many people are buying into the idea of refinancing their homes, which in some cases is a good thing. However, the later into a mortgage a person refinances, the worse an idea it is. According to the federal reserve's guide to refinancing, found here, when a person refinances their home, it essentially restarts their mortgage loan, this can be disastrous for people who have been paying for years.
Even with the adjusted interest rate, the amount of equity lost when you refinance is tremendous. It is better to set up desirable terms at the start of financing rather than renegotiate near the end of them. Locking in a fixed interest rate at or near the beginning of your contract works out far better than refinancing after 8 years of payments to save 1/2% in interest but lose all of your equity.
Another thing to look for in regards to financing is a no early payout penalty. This stipulation is especially useful in shorter term financing as it allows you to pay the purchase off early without paying thousands of dollars in interest penalties. This is one of the key ways to keep from paying all that unnecessary interest.
Talking with mortgage brokers and financial advisers, I have learned that one of the key ways that you can pay off your financed debt quickly is to go for a more affordable payment and then pay extra on top of that each month. Basically what this does is that any money paid after the initial payment is applied directly to the balance of the loan, thereby lowering the amount you owe and the amount of interest you pay in the long term.
Consider this on the small scale, you borrow $1,000 at a 5% fixed interest rate. Your payments are say $60 a month, with $50 of that going directly to the interest and the other towards the balance owed. You've now paid $10 towards the initial $1,000, which means the next month the interest remains relatively the same and yet again nothing goes towards the amount owed. If however, you pay your original $60 payment and then decide to pay another $90 that same month, all the sudden you've knock $100 off of your balance and now only owe $900, which also means the interest on next month's payment goes down considerably more. This is only a small scale demonstration, imagine the results on a $200,000 home mortgage.
There are times when we are stuck biting and clawing our way out of debt, but if we have to be in debt we should do it on our own terms