Debt, as with anything, can be good or bad. Debt management is the key to not digging yourself into a hole that you can’t climb out of. Easier said than done, you say, and I would agree with you. Even those who have substantial incomes still can wind up drowning in debt. It’s totally normal to think that you need to pay for things, important things, especially for your kids.

The list seems endless: private school; college; camp; synagogue/church dues and building funds; basketball lessons; tutors; extracurricular activities; food; clothing; vacations; weddings; cell phones; computers; life celebrations; unexpected medical bills, etc. Uhhhh … deep breath.

I hope your stress level is not going up. I mean, if you’re on a fixed salary how can you possibly avoid not tapping into your credit cards or equity lines or payday loans? And if you’re self-employed, don’t you need debt at least initially to sustain the cash flow of your ongoing business? Add to that the COVID pandemic that hit hard and exacerbated the many financial struggles.

I don’t know about you, but as the years have gone by, I have found it much more difficult to say no to my kids when they ask me for something, simply because I just love them. That being said, saying that I have found it more difficult to say no does not mean that I don’t. The general expectations I am finding are a bit out of control.

My observations have shown that the inability to say no to spending money and to deprive oneself of extras is the beginning of a journey on the pathway to debt. Saying no to kids or to oneself is not easy, and made more difficult once we look around us and see others having what we want. (Thou shall not covet your neighbor’s anything.) Who is happy? One who is happy with what he/she has. Happiness is not having the best of everything, but making the best of everything that you already have. Cliché overload and theoretically true, BUT a bit challenging to say the least, especially for all of us.

Well, putting all that I said aside, flash forward to where we are now. Let’s say that we tapped into all the credit facilities available to us and now we owe a bundle. What can we do to chip away at the accumulated debt?

There is a good debt. Good debt allows you to leverage your money for a return greater than what you are paying on the debt taken. The bad is the debt that you use to sustain yourself to pay for things that are necessities, and that are not necessities, and you can’t see the light at the end of the tunnel in terms of paying the debt back.

Right now there is a tremendous opportunity to get back on track and eliminate your debt. How can you do that? A debit card is an excellent tool to start. I never loved a debit card. I felt that if you ever lost it and somebody found it and used it, the money would immediately be debited from your account and then you would be out the money. The virtues are you can’t charge more than you have in the account, and that in and of itself can prevent you from borrowing more than you have. It also allows you to chip away at personal debt by knowing you can’t spend more than you have. It takes a bit of retraining to use just a debit card instead of a credit card, but well worth it in terms of managing your finances.

Being that I am a mortgage banker/broker, I would be remiss if I didn’t point out that the time is now to look at refinancing any of your debt and specifically your mortgage. Things change in life and we, hopefully, reposition ourselves in order to adopt and grow personally as well as financially. Now is the opportunity to refinance (reposition) before a possible increase in rates.

Your decision to refinance has to be made in the present and take into consideration the ultimate goal of what you want to achieve. Ask yourself: Do you want cash flow? Do you want to build equity? Are you selling your home in the next two years? Are you upscaling? Are you downscaling? Do you want to keep your home and buy a second home? Are you starting a business? Do you have investment possibilities on the horizon? Are you close to retirement? If so, what should you pay attention to in order to consider repositioning your finances through refinancing your mortgage?

ANSWER

Can you refinance to a lower rate and payment?—Your existing rate and payment might be higher than the current market rate due to:

1. a) rates dropping after your current loan closed;
2. b) having a derogatory credit profile, which may have had rate bumps and adjustments; currently your credit may have improved allowing the possibility of a better rate;
3. c) not having initially shopped for the most competitive rate;
4. d) having a first and second mortgage whose average rates are high; and
5. e) having a loan with mortgage insurance, which can be eliminated through a higher appraised value and or increased equity.

A balloon mortgage coming due—Long-term loans having minimal or no amortization of the outstanding principal, and a due date (payoff date) earlier than the term. These are called balloon loans (or interest-only loans). The loan principal is not self-amortizing; therefore a lump sum principal payment is due at a point in time specified in the mortgage note agreement, or the outstanding principal balance will amortize over 20 years at a substantially larger payment.

A need for predictability—Converting an adjustable rate to a fixed rate. Many people have taken adjustable rate mortgages because:

1. a) they are easier to qualify for;
2. b) the initial cash flow is better;
3. c) they had planned on a short term use of the property; and
4. d) the bet that rates would stay low forever and they would just churn into another adjustable.

Generally if current fixed rates are the same or lower than an existing ARM and if you plan to hold the property on a long-term basis, refinancing to a fixed rate product for stability may serve you well. Conversely, you may have decided that you plan to stay in your current property for the short term, only two to three years, so you may be able to refinance from a fixed rate to a lower adjustable rate (rates are typically lower) and payment in order to lower your payments.

Cashing out of your property for the greater good—You may refinance your mortgages to pull cash from the equity in your home for the following reasons:

Things that may add value:

1. a) home improvements;
2. b) investment opportunities;
3. c) purchase of a vacation home or other properties; and
4. d) to buy, expand or start a business.

Things that are living needs such as:

1. a) tuition;
2. b) year-end tax payments; and
3. c) celebrations (weddings, etc.)

Your construction loan coming due—If you have been doing construction on a new home, your loan will typically modify into a fixed-rate loan. You may want to compare that rate to current market rates with other lenders right before your final rate is set.

Eliminating monthly mortgage payments—For all those over 62 years of age: Reverse mortgages can eliminate your current monthly mortgage payment, consolidate your debt and create more positive cash flow. A reverse mortgage can also be used to purchase a new primary or second home, also while eliminating the monthly mortgage payment.

Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp. Visit him at www.greenbackcapital.com  or [email protected].