March 27, 2007, 4:03 pm

Pay Your High Interest Debt First

by: The Financial Blogger    Category: Pay off your Debts
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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.

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