Paying Down Debt

What’s your best investment today?

Many stocks and most houses are much cheaper now than they were at the start of the year, but if you are carrying a lot of credit card or other debt, your best bet is to pay it down.

For the sake of comparison, consider this scenario: you have a $10,000 credit card bill with a 19 percent interest rate, and the issuer requires you to pay 4 percent of the balance or $400. If you make only your minimum payment, it will take a bit more than 15 years to repay. If you repay now, over 10 years, you’ll save $15,672 in payments and $6,204 in interest.

Most folks don’t have $10,000 sitting idle in the bank, but you will free up the funds for investing later by paying on the debts gradually now, says John Waggoner, a financial writer for USA Today.

Cleaning up credit cards
Waggoner offers several ironclad rules for people trying to get out of debt: quit using your credit card, pay off the cards with the highest interest rate first, and try to get a better interest rate from the card issuer. Best of all, try to establish a home-equity loan; the interest rate will be tax-deductible.

Some other no-nos: forget using one credit card to pay off another; don’t tap into your retirement account because you’ll have to pay taxes on the withdrawal plus a 10 percent early withdrawal penalty; and forget the credit-repair agencies–they are quick to demand high up-front fees.

Mortgage foreclosure and house value
Today, thousands of Americans are trapped with unaffordable mortgages and have been turning in desperation to high-interest cards to head off foreclosure. Many older people refinanced into risky or less-than-favorable mortgages, using the money to remodel, pay down medical debt, or supplement a fixed income.

“Homeowners 75 or older are the fastest growing group of people who refinance,” says Len Raymond, founder of the nonprofit Homeowner Options for Massachusetts Elders, which counsels people age 50 and over who are threatened with foreclosure.

Nearly 3 million mortgages are delinquent or in foreclosure, he says, with a 75 percent surge in the past year. The delinquency rate for home mortgages is 6 percent, the highest level since 1985.

And there’s a spillover effect: foreclosure drives down the price of neighboring houses by nearly $5,000 each, estimates the nonprofit Center for Responsible Lending, which estimates that more than 40 million homes around the country will lose value because of foreclosures nearby.

Understanding the terms of your mortgage
Housing advocates around the country say many property owners became ensnarled in the mortgage mess simply because they misunderstood the terms of their new loans. They didn’t know how high, and how often, their adjustable-rate mortgage payments could rise.

“As long as housing prices kept going up, lenders kept coming up with those crazy mortgage products with mortgage rates that were to adjust out of sight,” says Jean Constantine-Davis, an attorney with AARP. “The loans are so complex you can barely understand them.”

NEED HELP WITH YOUR MORTGAGE?

These groups can give you a hand in understanding the complexities:

Institute for Foreclosure Legal Assistance, online at www.foreclosurelegalassistance.org, offers legal services, including AARP’s Legal Counsel for the Elderly.

NeighborWorks America, at (202) 220-2300 or online at www.nw.org, offers foreclosure counseling by state or zip code.

Mortgage Bankers Association has the Home Loan Learning Center online at www.homeloanlearningcenter.com; click on Foreclosure Prevention Resource Center.

National Community Reinvestment Coalition at (202) 628-8866 or online at www.ncrc.org.