Friday, September 21, 2007
Debts to Keep, Debts to Pay Off
 Do you have a debt strategy? Before you start laughing and say, "Sure, my strategy is to borrow more," hear me out. Debts can add to your net worth, just as investments can. But you have to be smart. Some loans are worth keeping, even enlarging, if you use the proceeds well. Others waste money or are downright risky. Mortgages: Some people can’t wait to get rid of their mortgage. So they add extra money to their payment every month. The faster the loan is reduced, the less total interest is owed to the bank. But what’s the hurry? If you’re young or middle-aged, it’s far more important to put the maximum into your retirement plan at work. If you work for yourself put the into a Keogh or SEP-IRA plan. With a house plus financial investments, you’re better diversified. During the past 30 years, the Standard & Poor’s 500 have earned an average of nearly 14 percent annually, according to Ibbotson Associates in Chicago. Long-term investors have a good shot at earning more money in their stock-owning mutual funds than they can save by paying their mortgages ahead of time. You might have a change of heart, however, when you retire. At that point, your monthly income will probably drop, making a mortgage harder to carry. At that point you can use some of your investment gains to pay off the bank. Home equity: How about borrowing against your house to invest in stocks? A home-equity loan is a second mortgage that you can tap at will for anything you want. At this writing, home-equity loans cost anywhere from 8 percent to 12 percent, depending on the lender. Those are variable rates, so they might rise. The more your loan costs, the greater the change that you won’t earn enough in stocks to make the risk worthwhile. Best advice: Save your home-equity borrowing for other things—for example, home improvements, major home repairs, or college tuition (the interest is deductible if you itemize on your return). You might also use a home-equity loan to pay off higher-cost credit card debt — but only if you truly intend to control your spending. Do not borrow against your home to consolidate your debt if you’re likely to run up your credit cards all over again. |
