More Americans Want to Pay Off Their Debts, Including the Biggest One: Mortgage

If there is anything good stemming out of this painful "great recession" from which we are slowly recovering is a new state of debt-free consciousness of the American consumer. Some call it "a rude awakening," some "a paradigm shift." But however you call it, one thing is obvious: most Americans are sick and tired of being in debt.

According to a recent survey quoted by CNBC, over 75% of consumers said that they had not increased their debts last year. In fact, almost 40% of them actually decreased their debts and 57% claim that they have a specific debt reduction or elimination goal. This debt-aversion trend seems to be picking up steam, as more consumers expressed this attitude now than in any prior surveys.

We see a similar trend in today's "mortgage world." Many of our Clients inquire about either reducing their loan balances or paying off their mortgages all together. This is a pretty radical shift of consciousness after years of credit indulgence, when homeowners used their appreciated properties and inflated equity like ATM machines, for all sorts of consumer spending and discretionary lifestyle expenses.

Now, with the deflation of property values, negative equity, and tight credit, this new attitude takes root. This is especially interesting because there seems to be a remarkable divergence between what the average consumer and the government are doing. The consumers are saying: "Hey, we had borrowed and spent and it did not work so well; now we want to get this debt monkey (more like a gorilla) off our backs." And the government is saying: "Hey, we had borrowed and spent and it did not work so well; now we need to 'prime the economic pump' (to use that famous expression of John Maynard Keynes), so we have to borrow and spend even more."

Paying off a credit card or car loan is one thing but paying off a mortgage can be daunting. Mortgages usually involve very substantial amounts of money and how one can get rid of such a tremendous amount of debt? Well, you know that old adage: "How does one eat an elephant? One bit at the time."

The "first bit" is to know what food you are "eating," meaning: Understand your mortgage and how it works. This understanding does not just mean knowing the note's interest rate or the term of the loan (although some folks do not even know that), but also comprehending how your loan works, what it is based on, how the payments are being applied towards the principal and interest, and understanding the difference between the interest rate and interest cost.

Now, if you feel silly for not knowing these things, please don't. Chances are that when you were getting your loan, the loan officer who was assisting you, did not have the knowledge, time, or inclination to explain these things to you. Or possibly, if he/she tried to explain them to you, perhaps you were not interested. The lending "lingo" can be confusing and intimidating.Loan documents are written by lawyers for lawyers, so how are borrowers, without mortgage banking background, supposed to understand them?

The simple answer is: they don't. The lending professionals assisting borrowers in obtaining financing should explain these matters in easy to understand terms. At the same time the borrowers should be interested in learning these things. Why? Because, simply put, big money is involved and it is your money! Did you know that if you borrow, even at today's low rates, $500,000 for 30 years; you will pay back almost $1 million if you keep your loan for the entire term? That's big money!

OK, so you know that you have, or about to have, this "mortgage monkey" on your back, now what? Well, first of all, you need to understand why you get a mortgage in the first place. If you are buying a property, you use a loan (liability) to acquire real property (asset). That is normal and financially healthy. Few people can buy properties for all cash. However, once you acquire your asset (let's say a single family home), your goal should be to have it, as quickly as possible, without any debt, or as they say in the real estate investment circles: have it free and clear.

Why? Two basic reasons: the first one is strictly financial and the other more psychological and emotional, but equally important. Financially, debt is a liability and as such it reduces the net value of your asset. Psychologically (and emotionally) speaking, debt is enslaving you. Yes, you heard it right: enslaving you (Merriam-Webster Dictionary's definition of "enslaving:" 1. Make (someone) a slave, 2. Cause (someone) to lose freedom of choice or action). Think about it. Can you afford to stop working if you have a mortgage payment?

But some of you may say: my mortgage interest is tax-deductible and I need my tax write offs! Yes, if there is an expense, which must occur, and it is tax-deductible, it is a less "bad" (but still not good) than expense which is not tax-deductible. However, having an expense for the sake of tax-deduction is a lousy deal. You need to spend $1.00 to get back $0.25-$0.30 from the taxman, does it make sense? And by the way, the home mortgage tax deduction is on the chopping block of many politicians who would love to get some extra tax revenues.

So now that we are in agreement that having free and clear home (or any other asset) with no debt on it is a good thing, how do you go about it? What do you do? I think you need be lucky, presuming that you understand the definition of LUCK, which is: Laboring Under the Correct Knowledge. You need to have the correct knowledge about how to work your mortgage to your advantage. In many cases, mortgages can be paid off five, ten, even twenty years earlier, without hardly any changes to your life style. There are different strategies which should be explored and evaluated, to see which one could work for your individual situation.

How do you become LUCKY? There are two basic options: One, you can spend the next couple of years on educating yourself on mortgages and trying to develop a strategy, which will work for your situation, or two, you can find a mortgage professional who has knowledge and tools to help you accomplish your mortgage debt-free goal. Option #1 seems like a lot of work. Option # 2 is more like it, however, if you think it is easy, think again.

There are not many mortgage professionals who can actually help you with designing a plan to reduce or pay off your mortgage sooner. Why? Because that is not how they were trained, how they think, and how the mortgage lending industry operates. The fact is that mortgage lending professionals are trained to originate (create) debt and then to service it (collect payments). They are not trained on how to help borrowers save money on interest charges because, let's be brutally honest here, that would take away some of the profits lenders earn.

Knowledge is one thing, but having proper "mortgage tools" is equally important. What do we mean by having proper mortgage tools? For instance, just to mention a few "tools", call around and find out how many lenders still offer Bi-weekly mortgage plans? Or, how many lenders would apply the payment first to the principal then to the interest? How about customizing your mortgage loan to your individual home ownership plans? What about reducing the mortgage interest rate and applying the savings to the principal loan balance to cut the term of the loan? These are some of the mortgage tools which could be essential in effective mortgage debt elimination planning.

In conclusion, the new paradigm in America is that less (debt) is more (freedom). Mortgage is the largest single debt most people have and borrowers should: one, understand how it works, two, evaluate and implement ways to reduce or eliminate it, and three, have free and clear assets.