This is where your finance takes place

Several techniques have been developed by planners and bankers to get rid off your debt quickly. Nobody likes to keep an unpaid balance on their credit cards at the end of the month. Therefore, I will present another way of paying your debts faster. By using the equity lying in your property, you might have an interesting solution.

The very first reason why you should use your property to pay off your other debts is the interest rate. In fact, you can borrow for as low as 5-6% in a form of a mortgage instead of paying 10,15 and even 25% on your credit cards and other loan. A mortgage is a large and secured debt. In addition to that, it is a highly competitive industry. Therefore, banks and other financial institutions will offer the greatest interest rate and borrowing conditions to keep your business within their branch.

Over time, your mortgage is decreasing along with your monthly payment and your property is increasing in value. We just had a great boom and it might be the perfect timing to refinance your mortgage. You can then benefit from the equity in your house. Mortgages are complex products and can offer many features such as the creation of sub-accounts.

With this new feature, you will be able to leave your original mortgage on the previous term and amortization in your first sub-account and create a new one to pay off your other debts. This sub-account can be set over 5 years or less in order to pay off your debts as fast as possible. By

consolidating all your debts into one payment, you will free up cash flow and pay less interest. These are two reasons why you will pay off your debts much faster than keeping them on your credit cards and lines of credit.

Refinancing your mortgage to pay off your debt is an effective and productive way of saving money and getting you back on a solid financial plan. As mentioned in life after consolidation, you must establish a budget and a financial plan after consolidating your debt. The last thing you want is to be forced to refinance your property again in 3 years for the same reason. Also, banks might not want to renegotiate your mortgage for a second and third time if they realize your spending habits.

In the post “Pay Your High Interest Debt first” I was explaining why you should not pay your mortgage first but you should put all your efforts in high interest debt. In order to make your life easier and to understand how by not paying your major debt, you become be debt free, I will explain the technique through an example. In fact, by decreasing your mortgage payment, you will create extra monthly cash flow. Apply this extra cash flow to your highest interest debt in order to pay it off in a timely matter. Here are some figures to show how the whole technique works:

Let’s take the example of David and Tracy, a young couple in their thirties. They bought their house five years ago. At that time, they took a twenty years contract in the amount of $190,000. The property value was $220,000. They wanted to get rid of their mortgage as soon as possible. After five years, their house value increased to $260,000. Therefore, they built $70,000 equity in their home. Here are the details of their debts and monthly payment:

Their mortgage is coming to renewal and instead of keeping their existing amortization period, this couple decided to refinance their mortgage over twenty-five years. Therefore, they will pay off their mortgage in thirty years instead of twenty (as they were making their payments for five years already). Actually, they will take less time than that… really? Here’s why:

By refinancing their mortgage, their payment will drop to $953,56. They will then create an extra cash flow in the amount of $325,94 per month. The next step is to apply this extra cash flow plus the minimum required payment to the highest interest debt. Therefore, they will start to pay off their Visa #2 with a 19% interest charge. Every month, they will make a payment in the amount of $350,94 ($25 minimum payment in addition to the $325,94). After less than four months, their Visa will show a 0$ balance. Who’s next? Mastercard!

The payment will increase to $360,94 a month for this one (we take the monthly payment of $350,94 and we add the minimum payment required for the Mastercard; $10). This debt will be paid off within two months only.

Every time one of your debts is paid off, you will free up more cash flow. Always apply your total monthly cash flow on the next debt and you will pay them off in no time. In the present situation, our young couple will take 39 payments to pay off all their credit cards, personal loan and their line of credit. After a little bit more than 3 years, they will be left with a mortgage and two car leases payments. They could also decide to buy off their lease and apply the same technique.

If they decide to keep their car leases, they will still have an extra monthly cash flow of $530,94 (add up all minimum payments in the above chart plus the first $325,94). They could then decide to increase their mortgage payment up to $1810,44 per month! The mortgage would be paid off within nine years. David and Tracy would have taken seventeen (5+3+9) years to pay it down instead of twenty years from their original plan. All this was possible just by changing their debt structure and without taking any risks. I told you, do NOT pay your mortgage!

Another reason why you should not put your mortgage as the first debt to be paid is because you probably have other debts with high interest charges. I’ll go through this debt elimination technique that will allow you to save money in no time. By paying your high interest debt first, you will create more cash flow each time a debt is paid off.

Instead of having a well balanced investment portfolio, most individuals have a much diversified portfolio… of debts! In fact, most of us have 4 to 5 credit cards for shopping; furniture loans to redecorate your bedroom, 1 or 2 lines of credit that were used to pay off the latest kitchen’s renovation, 1 or often 2 car leases and some even have a mortgage.

Of all of them, the mortgage has the lowest interest. In addition to that, the mortgage has the longest amortization as well. The amortization is used to define the lapse of time during which you will pay off your debt. In the mortgage language, we use the term to define the duration of a contract. At the end of the term, the loan is not necessarily paid off, but need to be renegotiated. Therefore, you can borrow to buy a property with rates as low as below prime in a case of a regular mortgage. If you wish to setup a HELOC, you will then pay around the prime rate. In both cases, you will pay less than for any other credit product.

The technique itself is very simple. It is based on the fact that your mortgage is your lowest interest debt. Then, why the heck would you like to pay it off first? By renegotiating your mortgage for the lowest rate and the longest amortization, you will be able to decrease mortgage to a maximum. I can already hear you say “But it’s going to take forever to pay off my mortgage. I didn’t make that much effort so far to being told I was wrong”. Well, I’m sorry to say that, but you were…

Decreasing your mortgage payment will create monthly cash flow. The cash flow is a liquid amount of money that is available for any usage on a defined period. Use this extra cash flow plus the minimum required payment on your highest interest debt. It will generally be a credit card. Then, once this first debt is paid off, that will free up more cash flow as you were forced to make minimum payments. Add up the old minimum payment to the cash flow that was created from your mortgage payment and attack another debt. Keep on replicate this technique by adding up the minimum payment of every paid off debt to your cash flow. Use this cash flow to pay off the next debt and so on. As you go in this technique, you will make bigger payment and pay off your debts faster. In the end, you will be left with only a mortgage to pay and a huge monthly cash flow that can be applied to it.

Unfortunately, like any other financial planning technique, it takes time and self discipline to achieve your goal. But in the end, you will pay less interest and you will get rid of those high interest debts. You will never be able to achieve anything if you pay the minimum payments on your cards every month. It’s time to meet up with your banker and setup this plan.

By consolidating your debts, you will definitely feel that you got rid of a huge burden. However, falling into the same traps is really easy. Individuals are confronted to ads, promotions and pre approved credit cards on a daily basis. How to react? What to do to prevent these situations? Here are some tips in order to put your financial situation back on track:

The very first thing to be done when you are doing a consolidation loan is to establish a well balanced budget with your financial advisor. There is no point of consolidating your debts if you know already that you won’t be able to get even at the end of each month. By making a budget, you’ll be able to see your monthly cash flow, pinpoint your unnecessary expenses and to set up goals. It is really important to put time and effort in your budget as it is the base of everything.

The best way to not crumble under a ton of debts again is to get rid off the temptation. By cutting off your credit cards, it will be harder to buy everything you want on the spot as you won’t have the money available to do so. You should keep only one credit card for emergency purposes. A small limit credit card would be preferable. Some credit cards company might send you a new card with more features after you cancelled the previous one. After all, you were a really good customer of theirs. Don’t even bother opening those envelopes; simply throw them in a garbage can. Your life and financial situation will just get better.

Consolidating your debts could be a painful process. You might feel guilty and not responsible. Consider this step more as a lesson and learn something out of it. In order to encourage your effort, you should aim for a specific goal. In order to do so, define a monthly amount that you will put aside. Calculate how much you need to reach your goal and pay yourself first. You probably already hear that expression but nothing can me more true. By paying yourself first, you oblige yourself to live without this money and to spend consequently. Set your goal as your main priority. That will motivate your action to save money instead of wasting it.

At your first meeting with a financial advisor, make sure to build a plan with him. Consolidation is only the first step of financial freedom. Make sure that your goal is integrated to a well balanced budget. Then, you will be in a better position to manage your personal finance. Don’t hesitate to follow up with that person as he is there to help you out. Independent financial advisors are particularly known to offer this kind of service. They will develop a plan related to your specific needs. Make sure to understand every step and term used by them. Sometime, small things are explained by big words for nothing.