Real Estate
April 24, 2018
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How to balance a budget with a mortgage

By: Scott Sheldon
April 13, 2018

Balancing a mortgage payment with other monthly liabilities in your life can be a tricky balancing act. Here’s some tips to follow when trying to juggle liabilities, while still being able to save money.

The ideal financial profile is a healthy blend of cash, credit and income. Simply put, the optimal financial profile would be to work yourself into a position where your mortgage payment is 36 percent of your monthly income or less where you have very little to no monthly consumer debts such as car loans, credit cards and you have at least a year’s worth of income in the bank.

Things that can get in the way of this:

•Car loans

•Student loans

•Personal loans

•Credit cards

Any other consumer obligations including alimony and tax debt

These aforementioned things can derail your savings plan quickly. One of the ways to get better control of your money is to consolidate debt if you don’t have the cash to pay it off. Remember even if you do have the cash to pay it off, doing so may impede your ability to achieve a sound financial position.

For example, let’s say for illustration purposes that you have $20,000 of credit card balances with payments at $600 per month. Let’s also say that you have a car loan that has $7k left on the balance for a payment at $400 a month. If you were to for example refinance your mortgage and consolidate the credit cards and the car loan into your mortgage payment dollar for dollar $27k of debt translated on a mortgage would change your monthly mortgage payment to the tune of about $175 a month allowing you to gain a monthly savings of $825 a month in this illustration. Mortgaging consumer liabilities greatly enhances your borrowing power.

Here are some of the other challenges that you’re going to encounter as consumer obligations mount…

Your ability to climb out of the financial predicament is harder because high balance credit cards will bring your credit score down making it more expensive to refinance or consolidate or switch cards. Your ability to save is jeopardized because monies are otherwise being diverted to creditors vs your bank account.

If you have a financial profile  that contains consumer obligations here are the following ways to support getting yourself out of the situation…

Personal loan to consolidate all debts is a possibility. You’ll have to have at least a decent credit score to secure favorable rate and terms however this obligation is non- tax-deductible and typically contains rates somewhere between 6 to 8 percent.

A home equity line of credit also can be used to consolidate debts, might not be a terrible thing to consider if you have a competitive first-rate mortgage. The challenge with this option is that home equity lines of credit and second mortgages are no longer tax deductible at all and home equity lines of credit are also adjustable rate mortgages.

Use cash to pay off the debts. By using your cash to pay off the debts you can leave your mortgage untouched however, then your liquidity goes down and your platform for financial growth e.g. your safety could become compromised.

Lastly, refinancing your mortgage might not be the most favorable thing in the world to do, but of the three other options it’s probably the most pragmatic since it is tax deductible and you can still cash out refinance your mortgage for rates in the middle fours. If you were to compare a mid-four percent mortgage rate to your current mortgage rate plus all the monthly obligations in your life with varying rates between 6 to 10 percent you’ll find that the blended interest rate that you’re presently paying far exceeds anything in the mid 4 percent range subsequently, pointing to the financial benefit of a refinancing.

If you were going to go to the refinance option, work with a lender who can help you formulate a budget and can provide real value to you in your financial situation. Avoid the lender that just gives you rates and fees without any follow-through. By moving in the direction of the optimal financial scenario as described above you’ll be well on your way to saving money, having a buffer when life events change as well as establishing a prudent wealth creation plan for you and your family.

Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.