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Why Getting Out of Debt Isn’t a Goal

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If you’re working on climbing your own debt mountain, I’ll bet you’ve said more than once, “I wish I was out of debt” or maybe “I’d love to have no debt.” I understand those thoughts. Yesterday’s expenses are a pretty heavy weight to shoulder as you climb toward some big goals. Improving your debt ratio will give you more cash flow and flexibility. Just don’t call getting out of debt a goal. It isn’t.

Back in “the day” when I was an advisor, at the beginning of the first meeting with a potential client, I used to tell them we’d do two things: find out what their goals were and then talk about how they’re managing their money. These two parts of a financial plan should work together, but in most cases aren’t.

In many of these meetings, when I’d ask for a list of goals, a client would lean forward and say, “I want to be out of debt.”

I’d answer, “What do you want to do once you’re done getting out of debt?”

Most of the time people were so stuck on their debt problem that they’d never stopped to think: what if it wasn’t there? What should I do then?

Debt Is a Gigantic, Ugly Hurdle With Pimples

 

Did you watch the hurdles at the Olympics? Getting out of debt is a hurdle, but the world’s ugliest one. Each athlete has a series of problems in their way to find the finish line. Athletes don’t say, “Man, I’d like to get over that ugly-ass hurdle.” They say “I want to win the race.”

“Retirement” “new house” and “education” are some of the finish lines. Your debt ratio is keeping you from that goal.

 

Why It Matters

 

When you reach the summit and actually get out of debt, you shouldn’t be surprised when you bellow out a gigantic “WHAT NOW?” You have more money, more freedom and more flexibility. What do you do with it all these new resources?

Doughnuts? A sports car? Create a life-like statue of a car on a mailbox?

While those are excellent possibilities, I know what you’d do: use it to reach some goals.

You’re more likely to win if you focus on your goals. Here’s what I mean:

Anyone who listens to our Two Guys and Your Money podcast may not be surprised to learn that I’m a stutterer. They called me “The Jackhammer” in first grade. People would say over and over “stop stuttering” as my face contorted into an ugly grimace and all I could muster was “Th-Th-Th-Th-Th-Th-“. The phrase “stop stuttering” did nothing to help. In fact, if I thought about NOT STUTTERING, all I thought about WAS STUTTERING. Ironic, isn’t it?

Instead, I had to quietly think about the point of my sentence. I needed to look at the finish line. After two years of speech therapy at Western Michigan University, it’s barely apparent that I stutter. Some brilliant teachers taught me skills to make sure that you rarely know when I’m struggling to get the right words out. Mostly, this is because I was taught to focus on the end game, not on the hurdle.

It’s the same when someone says “I want to lose weight,” isn’t it? You could even substitute “I should stop eating ice cream” or “You shouldn’t pick your nose.” In itself, these only point out the negative that you SHOULDN’T focus on.

 

Why Debt Returns

 

Every once in awhile, we see a person keep the laser focus it takes when getting out of debt without real goals. Once they reached the top of debt mountain, though, they often don’t have anything to push on toward, so what happens then?

They jump right back into debt.

In short, their debt ratio sunk because they didn’t have a real goal for their newfound wealth. There was nothing the get-out-of-debt wagon was really driving toward.

It’s the same for what we’d call “shallow goals” in our office. People who wanted to “leave work” struggle during retirement. They cope with the fact that they’re getting older and there isn’t any reason to wake up anymore.

Those people didn’t have a goal to “retire.” They just wanted out of THAT job!

 

How to Stay Clear of the Ugly Debt Monster

 

It’s been written so often that you need to write down your goals that it seems trite to repeat here, but it’s true. When you focus on buying a new house, you’ll have to eliminate the debt hurdle to get there. Instead of being flustered by your debt ratio, you’ll watch it melt away because you can’t get the new house without the debt being gone.

By following a clear set of positive goals that you’re steering toward, it’s easy to focus on paying down debt. There’s something tangible now behind it. You can pick out curtains, look at furniture, imagine landscaping. It’s real. Tangible.

You might be thinking that finance guru Dave Ramsey has helped people clear the debt hurdle by celebrating it. He sure has. He’s turned “getting out of debt” into a celebration, where people want to be able to cheer about that finish line themselves. They want to holler on the radio. Maybe this is an easier way to fight the “debt as goal” problem that America has. If people want to be able to say “I’m debt free” enough, they’ll stay motivated to reach the finish line. While it works (you turn the celebration into the finish line), I believe for most of us the easiest path to a lower debt ratio is to focus on what you really want in your life, and the debt will melt away. You’ll be cheering, too.

Photo: Alan Cleaver

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The Twenty-Minute-a-Week Budget: A Busy Couple’s Best Friend

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There are few times when I feel closer to Cheryl than when we’re talking about money.

I’m not talking about the stereotypical “You spent how much on coffee?” discussion, either. I’m talking about the heart-to-heart sit down where you walk through your dreams, goals and daily expenses.




It’s during these times that we both get excited because we’re moving in a unified direction toward concrete goals.

In theory, it should be easy. Talks about money should come naturally to two people who love each other and share much of their daily existence. You and I both know that it isn’t easy. You have to grind it out, because there are so many other, less important discussions that crowd out money talks. Things like “what are you laying out for dinner” and “what are we doing Saturday” get in the way of “what do we want to do with our money to successfully plan the rest of our lives?”

I tend to agree with David Chilton, author of the financial planning book The Wealthy Barber.  Like him, when I read yet-another-blog-post about yet-another-budget-idea, I think “budgets are baloney.” Like him, I believe that people do what they have to do to make ends meet.

The problem is that we spend far more time planning the near end than the far end.

My personal story about why most budgets don’t work:

As a financial advisor, I’d work with people on their budget. We’d figure out how much the family should spend on dinners, travel and holidays. Everyone would leave the meeting happy, ready for the challenge. A couple weeks later when we’d meet again, I’d be disappointed that the budget hadn’t worked. The couple wasn’t able to stay within the confines of this well-laid roadmap.

At first, I blamed the couples I worked with. They weren’t trying hard enough. They were so focused on irrelevant stuff that they weren’t truly trying to make a difference in the one area of their life that could change literally everything about their existence: their daily spending, their children’s education and their retirement vision. Everything.

Then I realized that I wasn’t following the type of budget I was recommending, either.

Who was I fooling? Certainly not my wife and kids. Sure, we were saving some money for retirement and college, but we weren’t doing nearly as well as you’d think, based on the money we were making. We’d find a reason for another dinner out, a treat for the kids, maybe an expensive dessert. Just little things. Almost always forgettable.

It was depressing.

So, I searched for a better way. And, the good news, is that after lots of trial and error, I found a successful budget plan.

I use it. Many clients use it. It’s had an astounding success rate. I wish I’d kept track of the statistics. Sadly, I never thought about it in those terms at the time.

So, with the usual aplomb you expect here, this is my scientific assertion: “This budget works for tons of people, dude.”

The Premise

The real truth behind my budget plan is this: most couples don’t talk about money. That’s all that my budget tried to accomplish. Rather than writing down every penny or looking backward at expenses, this budget looks forward. We’re paying attention to last week’s expenses, but only so we don’t keep making horrible mistakes.

The truth in many families is that they operate like mine: one member of the team lives in a castle in fantasyland—while the other is focused on the bottom line. Often, it’s not even one person in fantasyland, but both partners are living only half of the truth. In my family it worked like this:

Daily expenses: Cheryl knows every penny and I’m in fantasyland

Investments and Planning: I know every penny and Cheryl is in fantasyland

At first, you may think, “This works for them! They’re delegating tasks that each of them are good at. This works.”

I don’t dispute that couples should delegate tasks. My budget allows for one member of the family to know the intricate details of their favorite area. The problem is that fights occur when the second partner has no clue what’s going on. I’m focused on our stock that tanked or the insurance application that’s been sitting on the table for four days (and Cheryl still hasn’t signed), while she can’t figure out why I’d go and fill the car up with gas when I work from home and never use it. We needed that money for other expenses this week, and now it’s spent and wasting away in the driveway.

So, all this budget does is accomplishes one single goal: it gets you talking about money.

You’ll be amazed by how transformative it is.

Early Budget Attempts

This is funny. Initially when I set out to design a “better budget,” I had this cerebral concept of a “family meeting”, but didn’t know how it would work. We chiseled this budget through trial and error. When you try my system—and I hope you try it–you’ll find areas that don’t work for you. Please write me about how you’ve adapted this budget to meet your own needs. I’m always happy to find another success story who’s taken this and melded it to their situation.

Cheryl and I decided to try out my meeting idea. We had lots of papers and stuff and we sat down on a Sunday afternoon.

Here’s a list of all the things that went wrong:

1) We felt like dorks. There was no agenda or plan, just a “meeting.” I realized nearly immediately that we’d actually need something to discuss during this time, or I’d just be staring at my lovely wife for an hour. I find that to be fun, but nothing gets done.

2) We meandered. Sometimes our budget talk became a “why is Nick not focusing on his math homework?” discussion. Not what we’re looking for.

3) Once we got rolling, the meeting ran really long and was sometimes contentious. I realized that it was awesome for a single meeting, but committing to that every week when we’re both driven and busy with daily tasks was impossible to ask.

4) We’d forget important papers. Sometimes we’d have the water bill and other times we’d have the 401k, but rarely did we have everything we needed to make informed decisions.

5) The meeting wagon often left without us. A month would go by without the meeting because life got in the way. Money disagreement weeds would crowd the nice budget tree we were growing.

Our Findings

1) The budget needed to include a data collection system. Chasing papers is frustrating and time consuming.

2) We needed a clear agenda so we didn’t just stare at each other.

3) It had to be a quick meeting. We set a goal of fifteen minutes. Usually we take twenty, but we’re still trying.

4) We’d have to focus not just on today’s meeting, but how we can improve the process. We’ve honed this process for over ten years now.

5) We acknowledge that we’ll fall off the wagon sometimes. It’s important to get right back on and keep moving.

The Budget

We use a basket like this near the door to collect all bills and investment statements.

1) Bills and investment statements go into a basket near the door. Cheryl likes to pay bills immediately when they arrive. Unfortunately, that didn’t work for our budget because the important part, talking about expenses, would be missed if she just paid it right away. We now pay bills weekly. Some of my clients that are paid monthly only pay bills once per month, but look at every bill weekly that’s arrived.

2) The meeting has a set time and day of the week. Ours is Sunday afternoon. This started when my kids were young enough that they’d nap, so we’d take care of the budget meeting during that time. Now we meet at that time out of habit. This has become one of my favorite times of the week.

3) Here’s the agenda:

  • Each person looks through every bill. Cheryl opens one and I open another. We look quickly through each bill and then pass it to the other person. In this way, each of us knows what every expense is that passes through the house! We’ve found so, so many mistakes on our bills that it’ll need to be a separate post. We’ve also discovered ways to lower our heating bills, water bills and cell phone packages, among others. Just because it’s right in front of us.
  • Each person looks through every investment and insurance statement. We ask questions about each one and either answer them or write them down.
  • We delegate responsibilities. Cheryl usually pays the bills (the part she likes to do) and I call the investment and insurance people. I also usually investigate changes to our cell plans or call about mistakes on the bill (the part I like to do).
  • We talk about big expenses coming up that week, month and year. The main reason for this part of the budget is that I can’t stand being surprised by major expenses like school clothing. Shopping bags at the entrance to our house have caused more fights in our marriage than any others.
  • We review the Mint expense summary (I’ve printed this off just before the meeting).

That’s it. Fifteen to twenty minutes per week and we’ve accomplished the following:

  • We both know what the bills are in our house and the investments.
  • We still focus on our areas of expertise and enjoyment
  • Major expenses all are discussed before they’re made

This budget has solved more fights among couples than any other system I’ve seen or created. It may be easy to rip holes in because it’s not very analytical or sophisticated, but it works. I think this is because it acknowledges that people are busy creatures, and if you have a career and family, any budget plan has to be flexible enough to keep up.

In the next few weeks I’ll begin digging into pieces of this plan. We’ll examine areas of the budget that we’ve been able to cut. We’ll talk about home improvements that can lower your expenses. We’ll talk about automating your household so that the twenty-minute-a-week budget is a reality.

Okay, that’s my story. Now it’s your turn: What problems do you run into with your budget? Are there tricks you use that successfully help you avoid “the money fight?”

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How to Pay an Ugly Overdue Tax Bill

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I just read that Christie Brinkley owes over $500,000 in back taxes. That’s an ugly place to be. Sadly, I’ve been there before (not $500,000, but still a sizeable chunk of money). I’d like to share that story here.

When I began advising people about money, my background was similar to the many professional athletes who become financial advisors: I had no training. I was exactly “that guy” the pros and financial books warn you about when they say “don’t hire the new advisor.” Sure, I’d passed a few tests and took classes sponsored by the company I was going to work for, but I’d been an English major in college with an emphasis in creative writing. Talk about “not in Kansas anymore.” I wasn’t even on the same planet.

Why I’m An Expert In This Area

So, there I was, learning quickly. My paranoia about my lack of knowledge and the ability to “dumb down” difficult financial concepts helped me with early success in my new field—probably because I was coming at those concepts from a similar non-finance point of view. I hauled in a nice income. I had a great relationship with my clients. If I didn’t know something (which was often), I said “I don’t know, but I’ll find out.” That happened a ton.

Here’s the bad part of the story. I was a 1099 independent contractor. (For those of you unfamiliar with “1099”, it means that I didn’t actually work for the company. Because I was technically independent, zero taxes were taken out of my compensation. Without an knowledge of the full impact of not paying taxes, this was a financial meltdown ready to burst.)

Near the end of my first awesome year a friend said, “Who is your accountant?”

Me (thinking): “Dude, I should get one of those!”

So, I did. I found a guy named Tom. He was a great number-cruncher, but a horrible financial coach.

Tax guy Tom: “You owe $26,000.”

Me: “WTF?”

Tax Guy Tom (clueless): “Do you want to attach a check to the return?”

Me: “WTFFF????” I’m pretty sure I yelled. Yeah, I screamed. I should have been screaming at myself. It didn’t matter. He couldn’t believe I was dumb enough to spend every penny of the money I’d made. The funny part now is that I had used all that money to pay down debt.

I’d committed every stupid mistake in the book.

So, what did I do? I made the brilliant decision not to file my taxes, thinking that I’d find a way to catch up.

Note to the world: It doesn’t work that way. You can’t catch up.

So, Christie, I understand an overdue tax bill. I know that today you say that it’ll all be paid quickly. That’s good. If you can’t, or if any other reader is in a similar situation, here’s what to do.  This is what I should have done:

Joe’s Awesome 7 Step “Get Your Overdue Tax Bill Paid” Plan (or “Here’s What I Did”)

1) Find good tax advisors. My advisor helped me file back taxes and face the music. By avoiding the overdue tax bill, it was becoming bigger and more difficult to pay. I thought I was finding a “good” advisor when I met Tom. ….but, had I known how to ask questions, it would have gone smoother. AND I should have known to interview more than one person. I found a guy with lots of pretty letters after his name and hired the first one. I needed someone who could walk a beginner through the process of receipts and “what’s deductible and what ain’t.”

2) Communicate with the IRS. You need to face the music sooner or later. What surprised me is how easy the IRS people were to talk with. I was ashamed of my overdue tax bill, but they deal with people that have late taxes all day, every day.

Here’s a tip: the IRS phone line gets busy, so if you’re going to call, do it right after they open. You should get right through (I now call whenever I have questions or am feeling lonely). In my case, they knew promptly what programs to point me toward. Why did I call the IRS? My tax advisor told me to call them. She said it would help me stay on top of the situation. She also talked to them from time to time. (I had to sign a paper giving her the limited power to discuss my personal tax situation with the IRS first.)

3) Decide which method works best. There are two general directions you can decide between if you can’t pay the entire overdue tax at once. First, you can opt for an offer-in-compromise. This is a settlement with the IRS to pay less than your bill. I couldn’t go this route because (as my tax advisor explained), I had a high income stream and there was a good probability—in the IRS’ eyes—that they’d be able to collect the whole amount sooner or later (it was going to take me 30 years, but they don’t care. They may be nice, but those IRS zombies live forever, apparently.—I HAD to have one IRS joke in this piece….). If you owe less than $25,000, you can apply for an installment agreement, and will usually be accepted as long as you haven’t been a repeat offender. For amounts more than $25,000, the IRS is a little more like a nervous loanshark. You’ll have to fill out some extra paperwork.

4) Fill out the appropriate paperwork. Here’s a link to the IRS page describing all the appropriate tools. Before anything, you need to file the appropriate tax forms, if you haven’t already. Once that’s done, if you owe more than $25,000 on your overdue tax bill (like I did), you’ll need to fill out Form 433F, the Collection Information Statement. If you’re pursuing an installment agreement, complete Form 9465, Request for Installment Agreement. For an Offer in compromise, read IRS Booklet 646. It explains thoroughly the process of applying to reduce the amount you owe the government.

5) Be prepared to pay a fee to set up the agreement. As of this writing, direct debit and online payment plans cost $52, while payroll deduction plans run $105.

6) Wait for an answer from the IRS. They’ll respond in writing. If you called the IRS as I recommend above, you may receive an answer while you’re on the phone with the agent.

7) Realize that speed is your friend. Confronting the pain today is better than waiting. If you’ve managed to accumulate $500k in debt, you’ll owe interest and may owe penalties if you didn’t communicate effectively with the IRS.

Forms Needed:

IRS Collection Information Statement, Form 433F

IRS Installment Agreement Request, Form 9465

IRS Offer in Compromise booklet 646

Have a tax issue you’d like to discuss? While AverageJoe and TheOtherGuy aren’t tax advisors, we can point you toward resources and strategies. Use the comment section below or email me at joe (at) thefreefinancialadvisor (dot) com.

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There’s Something Wrong With The Car

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There are good days and then there are bad days. Neither of those descriptions fit last Saturday morning.

I woke up to my son running in the door.

Nick: Dad, there’s something wrong with the car. You have to come outside.

me: Where did Kim Kardashian run off to?

Nick: Dad, wake up. Come outside.

me: What time is it?

Nick: 7 o’clock. Come outside. There’s something wrong with the car.

me: (suddenly realizing Kim isn’t coming back, I’m not drunk in a Beverly Hills swimming pool and I’m a happily married parent of twin 16 year olds) What’s wrong with the car?

Nick: Just come outside

Cheryl: Go, Joe

me: (I’m thinking to myself: why don’t you go?) I’m saying out loud: Okay

(18 years! Why do you ask?)

Cheryl (to Nick): What’s wrong with the car, honey.

Nick: I hit a mailbox.

me: Okay. (out of bed, throw on jeans and a tee-shirt, follow Nick outside)

I shouldn’t interrupt the story here, but it’s time for a little op/ed piece.

Who the F$%# decided that mailboxes should go in brick structures? My mailbox looks like this:

Our Mailbox

Awesome dent in the side, huh? I was going to actually change this mailbox until some kids late at night kept driving down our street with a kid out the car window slamming a baseball bat into everyone’s property. Where before, I saw a rotten looking mailbox, now I saw less cost when it’s finally destroyed.

So, back to our story…..

I’m following Nick through the house, expecting to see my mailbox on its side, with maybe a little dent in the car fender. My son has been driving for six weeks. We’ll have a talk about it and he’ll go to his swim meet. We’ll laugh about it when he’s 35 years old.

Heading up the stairs, I realize that many of my neighbor’s mailboxes look like this:

random neighborhood mailbox

Holy brick-house, Batman! The front end of the car might be crumpled around that thing. Now I’m worried. By the time we hit the front door my pace is almost as fast as a cop headed for Dunkin’ Donuts.

me: Whose mailbox did you hit?

Nick: Huh? (he’s 16. I omitted most of the 16-isms for brevity, but had to leave one “huh?” in here.)

me: Whose mailbox?

Nick: Bill’s

me: Oh sh$#.

Bill lives across the street and has a mailbox similar to the one above. The front of our Saturn Aura is probably crushed in. Being a Saturn, it’s a collector’s item (that’s a joke, by the way. Some are apparent, others I’ll point out as we go.).

me: How did it happen?

Nick: I was trying to change a CD.

me: Nick! Don’t try to change a CD while driving. Keep your hands on the wheel. (I think I’m giving good parenting advice here, but I’m not. It turns out that my daughter–remember I said I had two driving? My insurance company remembers….and giggles out loud.–My daughter had a GLEE CD playing LOUD. I know because, when I turned on the car, it was still playing. My poor son. A Glee CD. The Horror.  Forget the mailbox, I would have hit Bill’s house hard enough to end it all.)

Here’s what I see. Remember that as a recovering advisor for 200 families, it’s difficult to amaze me. I’ve pretty much seen it all.

Except this:

Wheelie!

We call it “Wheelie!” or “Full-Sized Car Statue on an attractive brick base.”

My car is on two wheels (the left two if we want to be technical about it), and is TETTERING ON THE TOP OF my neighbor’s brick mailbox).

me: How the hell did you get the car all the way on top of it?

Nick: I don’t know.

Me: What did you tell me inside? Something’s wrong with the car?

Nick: Yeah.

Me: Understated. In social circles, that’s classy.

It took TWO wreckers to get the mailbox out from under the car. One to pick up the front end and another to drag out the mailbox.

Do you know that whole thing about people getting their 15 minutes of fame? The wrecker drivers all took pictures with their cameras “for the record.” I’m sure my car claimed its 15 minutes and more that night. You may have already seen this picture on Facebook.

So, in closing: please read my blog. Click on every advertising link. Next week I’ll have advice on how to deal with your car insurance company, and how to write big $%#!ing checks without shaking (much).

5 Biggest Refinance Concerns

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This will end up in the toolbox, but because only yesterday I posted an exciting post on the reasons why you should consider NOT refinancing, today I think it’s appropriate to post some of the concerns a good advisor might have when a client is considering changing a home loan.

There are so, so many variables to consider—to cliché this article as quickly as possible—your head will spin.

Let’s forget the smart-talk and just jump into the list:

1)      Cash flow. This is the primary hook mortgage companies use to secure your signature on the bottom line.  Like a fish to the worm, all a lender has to say is that “you’re gonna save $300 per month!” and we’re all lining up drooling for debt.

(Apparently the only offer credit card companies need to bait the hook is a free NASCAR blanket, but that’s another story.)

Comparing cash flow isn’t as important as knowing how you’re going to use your new free cash each month. If you plan to use the funds for a boat down payment, you may wish to reconsider. However, if you can set up an automatic payment to alleviate some other debt or save into your child’s college fund, I’m on board.

Final analysis:  Just like you shouldn’t eat hamburgers every day just because they tastes good (lesson learned!), you shouldn’t choose to refinance based on cash flow alone.

2)      Length of loan.  If you’re close to paying off your mortgage, why would you sign up to start over again?  I’ve seen people refinance to a lower rate and smaller payments, only to be in debt for 27 years longer than necessary.  If you’re craving cash flow, are there other areas of your life that can be cut to avoid a mortgage refinance.  

Final analysis:  Compare terms before signing on the dotted line.  Dying with debt isn’t as fun as your weird brother-in-law makes it sound.

3)      Know thyself.  Mortgages aren’t always about math and the “logical move.” I’ve met some pretty broke professors during my time advising families. Instead, often taking on new debt is about knowing yourself.  Can you handle flexibility?  Will you pay extra Here are some options:

–          Use a portion of your savings to shorten the loan terms. Ask the lender if they’ll complete a rate-and-term mortgage, where your payment drops but the length of the loan stays the same. If not, ask what shorter terms are available. You may be surprised that the lender will offer you a lower rate on shorter-term loans.

–          Throw your savings toward larger payments to pay the loan down early. Personally, I like this option. But once again, know theyself.  This would have been the worst option for many of my clients.

Here’s why I like the last option: things happen. When you’re in financial trouble, I like the flexibility of being able to stop paying extra on the mortgage. I have a built-in safety net when times are tough…and over the next several years, who knows what’s going to happen?

I also trust myself to pay extra on the loan.  Can you say the same?  If not, lock yourself in on a shorter term to force yourself to pay more.  You’ll be thankful you did.

Final analysis:  What is your money personality? Are you desperately seeking boundaries or do you prefer long walks in the rain hand-in-hand with flexibility?

4)      Terms. Mortgages, friends, aren’t free. I know. Before you swoon you may wish to sit down. But before you flip out and rush the refinance train, let’s compare costs with benefits. Does it make sense to save a few bucks if you’re going to spend much of your savings in expenses.

Here’s an easy, worthwhile math problem.  If you’re going to save $200 per month and the refinance expenses are $2,400, it’s going to take a whopping two years before you realize a dime of cash flow savings.  Additionally, you won’t wrap your arms around any interest rate savings until much later in the mortgage.  For more on that topic, read this post.

There are no-point, no-cost mortgages available, but they aren’t free either. When a mortgage company agrees to let you off the hook on fees, they’ll recoup the money they lose by jacking up your interest rate a little. Many advisors prefer this again—although they know it’s a higher rate–for flexibility reasons.  For me, it always depended on the client and how high the fees would have been if we’d just paid them.

In this market, I kind of like paying fees up-front. Knowing that historically rates haven’t bumped this low often, there’s a great chance I’ll never refinance again. By getting the fees out of the way now and maybe even paying points to get them even lower, I can save a ton of money now.

Final analysis: Fees are a reality. Decide where you’d rather get hit instead of letting the bank just smack you!

5)      Total debt scenario. Many families separate their credit card debt, car payment and home loan from each other. My brother doesn’t like the different foods on his plate to touch. I’ve never understood either of these.

Think of yourself as a company. All that your board of directors is worried about is the bottom line. Create a total debt repayment strategy. Now you’ll analyze your home debt more wisely:

–          Can I take care of some credit card balances while refinancing?  Note:  remember rule #3 above?  If you’re just going to keep using the credit card, all you’re doing is taking short-term consumer debt and turning it into long-term debt against your house.  If you can’t control your credit card spending you don’t want to lose your home. 

–          What is the refinanced loan going to do to my debt picture long term?  Will I now have a mortgage in retirement? While my kids are in college? Are there ways to restructure your debt to avoid these upcoming cash flow crunches?

Final analysis:  You read the entire map when headed on vacation, not just the next few miles. Include all the variables in your analysis and view your family financial picture as a business to make better decisions.

One area some may be surprised I didn’t include with these five factors.  Don’t try to guess the future direction of interest rates. That’s betting, which is a losing game. Evaluate the current opportunity and whether changing course will help your family or not. Don’t get too interested in your refinance market horoscope.

Joe

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