Our next guest post is from Wanda Hall, a senior loan officer at Primary Residential Mortgage. Wanda is a great resource for clients looking to buy a HUD house because of her experience dealing with these properties. I’m so glad to welcome to the blog!
We have less equity in our homes and bigger balances on our credit cards than ever before. A big chunk of our disposable income pays for “stuff” we bought long ago. I’ve seen enough examples of people who are taking the wrong approach to paying off their debts, and doing more financial damage to themselves in the process.
Here are some examples of when it’s not good to pay off what we owe:
1. When we are targeting the wrong debt
Many people are convinced that they should increase their investment in their homes by paying down their mortgages. Several home owners opt for a 15-year loan instead of the standard 30-year loan.
Unfortunately, in their rush to free themselves of their home loans, many are ignoring other debts and obligations that ultimately will cost them more. It makes no sense, for example, to speed up paying off low-interest, tax-deductable debt if you’ve got any other kind of debt – – credit cards, car loans, personal loans, student loans, etc.
When it comes to paying off balances, your first goal should be to pay off your highest-rate, nondeductable debt. Only after the credit cards, personal loans and car loans are retired should you even consider prepaying a deductable student loan or business loan. Mortgage interest is typically the last debt you want to pay.
2. When you’re neglecting your retirement savings
This seems to a hard concept for younger people to grasp. Surely they’ve got years to save for retirement. Why not focus on getting out of debt now?
It’s because – – times flies – – and you can’t get back an opportunity to contribute to a tax-advantaged retirement plan once you’ve let it slip away.
3. When you’re using your retirement savings
If there’s anything worse than forgoing retirement savings, it’s raiding what you’ve already stockpiled. Most people have no idea how much they’ll lose to taxes and penalties when they withdraw this money.
It can be a lot of money: Depending on your state and federal tax bracket, you’ll typically sacrifice one-quarter to one-half of whatever you withdraw.
Once the money’s withdrawn from a retirment plan, you can’t put it back, and you’ve lost all that future tax-deferred compounding.
4. When it’s hopeless
People still struggle with bills that are simply impossible to pay off. They empty their retirement funds, tap their home equity and scrape for years to pay enormus medical bills, bad business loans or credit card debt. Many continue paying long past the point it makes sense, with no real hope of financial recovery. Some people got slammed with accidents, disease, job loss, divorce or other set backs. There’s usually plenty of blame to go around, and some of it belongs to a financial system that keeps spewing out credit to people clearly unable, for what ever reason to handle it.
When trying to decide whether or not to pay off debt, always seek the advice of a professional.
More questions? Contact:
Wanda Hall
Primary Residential Mortgage
131 Wendover Drive Kingsport, TN 37663
Office: 423-246-0222
Fax: 423-245-5132
Cell: 423-534-9979
NMLS #156236