By Larry Lane for InvestorZoo.com Some time in your life you will need to borrow money. Chances are, you will or have already gone to college. Without credit and loans, you wouldn’t have been able to afford to go to school. With the high cost of cars, it would be very difficult to purchase a new car outright without credit. Don’t Pay Off Your Mortgage Your take home dollars need to be utilized to their fullest potential. You might think by borrowing, you are digging yourself a financial hole. However, if money is borrowed correctly, it can turn out to be a very good investment. Wealthy individuals have used borrowed money and leverage to amass fortunes. While you may not be the next Donald Trump, you can still use the same principles to help fund your retirement and live a fuller life. If you’ve purchased a home, you’ve probably borrowed money from the bank and acquired a mortgage. In previous decades, homeowners had mortgage burning ceremonies signifying they’ve finally paid their obligation to the bank in full. At 10-15% interest, that was a huge obligation and difficult to accomplish to say the least. At today’s interest rates, it simply doesn’t make sense to ever pay off your mortgage. Interest rates for mortgages are at historic lows. If you have decent credit and are employed, you can take out a mortgage at about 5% or less. If you are in the 25% tax bracket, your true cost of borrowing money is reduced to 3.75% after your tax deduction is taken into account. While turbulent, the stock market has returned over 9% per year. By extending your mortgage out as long as possible, you can leverage money and take advantage of a monetary situation which may never be available again. Instead of paying your mortgage off early, invest this money in your 401k or Roth IRA. Your money will grow tax free up until you withdraw it. Invested over a 20 year period and you could pad your retirement account simply by taking advantage of compound interest. Borrowing cheap and investing the balance in a 401k or IRA only works if you are disciplined to invest your left over capital at the end of the month. You must be extremely disciplined and not fall into any bad spending habits. If you spend money on flat screen TVs, vacations and other toys, you’ll turn into the typical American consumer. You will end up short of your retirement goals and forced to work an additional 5 to 10 years. Home equity loans There are two schools of thought when utilizing home equity loans. When used correctly, home equity loans can be an invaluable tool. Used incorrectly and the outcome can be disastrous. If you are unfortunate enough to have credit card or other debt that you’re paying 10% or more, you might want to take advantage of the equity in your home. Utilizing a home equity loan may be able to save you 5% or more in interest expenses. You will be able to deduct interest paid on your home equity loan. Pay interest on your credit cards and none of the interest is deductable. If you use your home equity loan to pay off your credit card bills, your credit score may also improve. Depending on your credit card balances, taking advantage of a home equity loan may save your several hundred dollars per month. Drawbacks If you use a home equity loan to pay off your credit card balances, you are exchanging an unsecured loan for a secured one. Credit card debt is known as unsecured debt and is the most expensive debt you can obtain. If you become unemployed and unable to pay off your credit cards, you will be referred to a collection company. They will call and harass you until your debts are finally paid in full. Your credit score will obviously suffer as well. Home equity loans on the other hand are secured debt. Your home equity loan is secured against your home. If you default and don’t pay your loan, you risk losing your house to foreclosure. Home equity loans can be a great tool if used correctly. They can be used to consolidate several loans into one convenient bill. Tired of mailing out checks to the department store, two or three different credit card companies and your car loan? Take out a home equity loan and pay just one company at the end of the month. The article above is intended to provide information of a general nature and may not be suitable for your individual situation. Please consult a qualified licensed financial advisor before making any financial decision.
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