In a perfect world, everyone would be an expert when it comes to borrowing. Unfortunately, that just isn’t the case. Over the past 18 years, Accunet has seen our fair share of missteps made by borrowers when purchasing or refinancing a home, and while we love the opportunity to use our expertise to educate and help our customers, there are some things that a prospective borrower would benefit from knowing in the preliminary stages of borrowing. These are Accunet’s Top 5 Rules for Smart Borrowing.
Rule #1: Prioritize paying off high interest debts as quickly as possible while taking your time paying off low interest debts.
What’s the highest rate debt most people have? Credit card. The first piece of advice here is to not carry credit card balances from month-to-month, but if you have any credit card balances, of course, work on paying off the ones with the highest interest rates first. And speaking of credit cards, don’t fall for the 0% balance transfer or 0% checks they send in the mail – there’s no such thing as 0% interest on a credit card. The bank will always charge a cash advance fee of between 2% to 5% of the amount at 0%. Then if you charge anything else on that card beyond that which you borrowed a 0%, you pay interest on the additional charges at the maximum rate, that can reach the high teens, until the 0% balance is paid in full.
Rule #2 – Understand the after-tax cost of the interest rates you’re paying.
Mortgage interest is the only type of interest that is tax deductible. If you’re paying 4% on your mortgage and you’re in the 25% marginal federal income tax bracket, your after-tax interest rate is 3%. It’s as if your mortgage rate is “on sale” compared to all your other interest rates. Here you’re getting 25% off just like you do at may department stores.
Rule #3 – Match the length of the loan to the expected life of the thing you’re financing.
- Never finance a car with a home equity line of credit. The car is going to last 5 to 10 years. The home equity line payments are interest only, so it’s quite likely you’ll still have a balance on the home equity line and still be paying interest long after the car is in the junk yard.
- Never finance a vacation on a home equity line of credit or credit card unless you can pay it off in six months or less. The vacation might last two weeks, but you could be paying interest for years.
- It’s okay to finance home improvements on your 30-year mortgage, because the improvements should last 30 years. The same goes for a college education.
Rule #4 – Always have at least 6 months of monthly expenses in non-retirement savings or investments.
That means you may only want to put 15% down when you’re buying that next home instead of 20% which would leave you with $5 plus the lint in your pockets after closing.
RULE #5 – Always have some emergency borrowing power
Examples would be a credit card or two with no balance and a high limit, or a home equity line of credit with no balance. The time to apply for credit is when you don’t need it, because sometimes when you need a loan the most, like when you’ve lost your job, you can’t get approved.
Hopefully these rules will give you a baseline to start from, and when you’re ready to take the next step just contact your friendly loan experts at Accunet Mortgage, and we will guide you the rest of the way.