In September 2011 the President announced a plan to slash the federal deficit by more than $3 Trillion. The plan calls for $1.5 Trillion in new taxes as well as $320 Billion in cuts to Medicare and Medicaid. If our deficit grows, additional cuts could be coming to Medicare and other social programs. A Reverse Mortgage could provide income to offset the possible short falls in these government programs.
– A measure of the burden of U.S. household debt sank to a record low in the fourth quarter, offering more evidence of improving household finances that should lend support to consumer spending and the economy.
The household debt-service ratio – an estimate of the share of debt payments to disposable personal income – fell to 10.38 percent, the Federal Reserve said on Wednesday.
That was the lowest since the series started in 1980. In comparison, the ratio, which takes into account outstanding mortgage and consumer debt, was 10.56 percent in the third quarter. It peaked in the third quarter of 2007, shortly before the U.S. economy fell into recession.
“Household balance sheets are improving and that lays the foundation for more spending, which in turn can lead to a virtuous cycle of more business investment and hopefully more jobs,” said Dana Saporta, director of U.S. economics research at Credit Suisse in New York.
U.S. households built up a massive debt load as the housing bubble expanded. Efforts to pay down those debts have been a restraint on spending and the economy’s recovery.
Now, it appears that process of deleveraging may have run its course.
Data from the Fed last week showed household debt rose at a 2.5 percent annual rate in the fourth quarter, the fastest since early 2008, while a report last month from the New York Federal Reserve Bank said consumer debt rose in the last three months of 2012 for the first time in four years.
A HELPING HAND FROM THE FED
Near record low interest rates as the U.S. central bank tries to foster faster economic growth are helping households to reduce their debt, which should free them to take on more debt or spend more freely.
The Fed has held overnight rates near zero since December 2008. It has bought around $2.5 trillion in bonds to further lower borrowing costs.
Still, economists do not expect household borrowing to surge just yet.
They also cautioned that the data could be overstating the improvement in household balance sheets, noting that the report did not make a distinction between those who are paying off their debt and those who have lost access to credit after losing their homes to foreclosure, among other factors.
“We also need to be aware that a lot of the borrowing we have been seeing in recent months has been student loans, which is different than if people were borrowing to improve their homes,” Saporta said.
An even broader measure of financial obligations that includes automobile lease payments and the cost of renting a home also fell in the fourth quarter, dropping to 15.48 percent of disposable income – the lowest level since the third quarter of 1981.
That drop reflected an easier burden for homeowners as mortgage debt payments dropped to 8.67 percent of disposable income in the fourth quarter, the lowest in nearly 13 years.
Both the overall homeowners measure and separate mortgage gauge peaked in the third quarter of 2007.
In contrast, the relative cost of rent rose to its highest level since the fourth quarter of 2009.
The weak housing market has led Americans away from home ownership and toward renting, pushing up rents. At the same time, a modest economic recovery has encouraged some people who had moved in with family and friends to seek their own lodgings, further strengthening the rental market.
Why Make an Extra Mortgage Payment?
Considering the current state of the economy, many people are trying to pay
down debt to unburden themselves financially. Have you considered paying down
your home loan? Your mortgage is probably the biggest debt you will have in
your lifetime; paying it off early will save you potentially thousands of
dollars that you’ll keep in your pocket, to spend on vacations or college
tuition, or to save for a rainy day.
If you’re interested in paying down your mortgage faster, you can make just one
extra payment per month — or even just one extra payment over the life of the
loan. You’ll be surprised at how much you can save!
Making a Difference
Here’s an example. Say you have a mortgage for $210,000. Your interest rate is
4% and your original monthly payments are about $1,003. If you make just one
extra payment of $1,000 on your loan, just once, you’ll pay off your loan up to
three months earlier, saving you all the interest you would have paid during
Now here’s a more exciting example. Using the same loan parameters above, if
you add $50 to every monthly payment, you’ll pay off your loan nearly two years
ahead of schedule. Take a look at your loan statement; how much interest will
you save now?
And another interesting tip: A single large payment early in the life of the
loan will shorten your term and reduce your interest payments more than a
contribution made later on, although any additional payment will show benefits.
Finding the Cash
If you get paid every two weeks, twice a year you’ll get an “extra”
check. Consider putting those two checks directly toward your mortgage. Even
taking half of them and paying down your loan will help reduce your loan term
and the amount you owe.
If you decide to make just one extra payment a year, consider budgeting for it
every month. An extra payment of $1,003 is $83.58 per month, or $19.29 per
week. Committing to setting aside the cash on a regular basis can make it seem
more manageable, especially if it means just skipping a couple of coffees and
lunch out one day each week.
Is This the Right Choice for You?
Remember, however, that paying off a home mortgage loan may not be the best
choice for everyone. If you have other loans, especially ones with higher
interest rates than your mortgage, then they should probably be your priority
to pay off. Credit cards and car loans usually have higher rates than home loans.
In addition, the government currently allows homeowners to write off mortgage
interest payments on their taxes.* if you are seeing significant benefits from
this credit on your tax returns, you may not want to pay off your home loan at
Making a Decision
Paying off your mortgage, as you can see, is not a decision to be taken
lightly. Be sure to review all your debts and the interest you’re paying. You
may want to consult a financial planner or accountant to ensure eliminating
this debt will have a positive effect on your finances.
If paying off your loan early is a move you’re contemplating, please contact me
so I can help you review your options, recommend a local financial expert if
you need one, and provide any assistance I can so that you’re able to make the
best decisions for your personal financial security. I look forward to helping
you save some money!
* We are not a tax advisory firm. The information contained in this
article is for informational purposes only and may not reflect current tax year
rules and regulations. Consult your tax advisor or the IRS for current tax year
rules, restrictions and regulations.
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