When in Doubt, Get Debt Out

On October 27, AARP Pennsylvania hosted a discussion on debt reduction, savings, and retirement planning, featuring guest speakers Lee Baker, a certified financial planner, and Georgette Miller. Miller, a lawyer who provides debt reduction services, is also an author on the subject of living debt-free, and frequently talks about finances on her radio program. Miller sat down with us to offer her thoughts on several emerging themes around debt and savings.

 

AARP: Georgette, during our discussion with thousands of Pennsylvanians throughout the Commonwealth, there were several questions about reverse mortgages. How does it work? What are the advantages and disadvantages of a reverse mortgage?

Miller: Reverse mortgages are tools for seniors that own their home and the home has a significant amount of equity. If the senior needs to access the equity because they cannot meet their day-to-day expenses, then this may be a useful means to access the equity in the home. Generally, reverse mortgage don’t have to be paid back until the owner has expired. At that point, the home is usually transferred to the owner’s heirs - but the heirs could have 6-12 months to get their own traditional mortgage or sell the property to pay back the reverse mortgage.

AARP: Speaking of mortgages, several listeners on our recent financial security discussion had questions about paying off their traditional mortgage. Is it better to pay the mortgage off as quickly as possible or stick to the monthly payment and use the cash flow elsewhere?

Miller: Generally it’s not a bad idea to have your home paid off as soon as possible, but there may be other factors you may need to consider. Think of it this way: a $200,000 mortgage at 6 percent over a traditional 30-year loan would cost $431,676. That’s $231,676 in interest alone!  However, if you chose to pay off your mortgage as soon as possible, let’s say in 15 years instead of the prescribed 30, then you will only pay $103,788 in interest.

AARP: What are your thoughts on refinancing? We had callers who shared that they have either retired or are not working, but their home mortgages are not paid off yet.

Miller: Refinancing is something you should pause and think about. Generally, when you refinance, you ‘start the clock’ at 30 years again unless you specifically request a shorter term loan. Some questions you should ask yourself:

1. How much longer do I want to make a mortgage payment?
2. Is it more cost effective to just make additional principle payments and pay the mortgage off?
3. What is the amount of mortgage payment I can afford and for how much longer?

 

AARP: Let’s switch gears, since we took several questions about credit card debt. Is it better to pay off debt by higher balance or higher interest rate?

Miller: It depends. There is no hard-and-fast rule but you can use an amortization calculator and look at the numbers. In the calculator, you put in the amount the interest rate is and the payments you intend to make, or how long before you intend to pay off the card, and it will calculate the interest for you.

AARP: Would you recommend transferring credit card debt off of multiple cards to a single card (perhaps one that offers a lower rate)?

Miller: That could be a good strategy as long as you actually pay off the card balance and do no then turn around and place charges on the prior multiple cards. The whole point is to pay off the debt and not get back into debt again.

AARP: What if you have multiple forms of debt – like credit card debt, student loans, and an equity line of credit. Do you have any tips on how to pay off multiple forms of debt?

Miller: Student loans are, in my opinion, the most dreadful kind of debt. It is so hard to get rid of it! Even if someone files for bankruptcy and gets rid of debt owed to the IRS, they cannot get rid of student loans – that is how dreadful they are. If you have a student loan, consider enrolling in the income-based repayment program. This will set your payments based on how much you earn, not how much you owe. If you make your payments for the required period of time and your loans are not paid in full, the balance could be forgiven.

As for credit card debt, consider finding a local non-profit credit counseling organization and get into a debt management program (DMP) to pay them off. If you are in a really extreme circumstance, you may consider bankruptcy. If you do, you should consult an attorney and determine if the debt can be discharged and if this is the best solution for your specific situation.

My thoughts on home equity – I always advocate paying off your home. You can weather almost any financial challenge if you are not concerned about the roof over your head, but weigh your options first.

AARP: Should people consider using IRA money to pay off credit card debt? We heard from a few individuals who were considering this option.

Miller: There are many options for getting out of debt, but taking funds from your IRA is usually not the best one. You will be robbing your retired self. Instead, consider consolidating with a reputable nonprofit consumer counseling company. They can enroll you in a debt management plan which could help you pay off all of your credit card debts at a low- or 0% -interest rate.

AARP: Now that you’ve shared some tips around the subject of debt, can you share your thoughts on savings? Several callers indicated that they were on disability and couldn’t find work. What options would they have for staying out of debt and starting to save? Should they sell off assets?

Miller: In this scenario, perhaps considering a reverse mortgage might make sense if you are age-eligible where you will be able to access the equity in your home but don’t have to leave.

AARP: Ah, we’re full-circle to our first topic. There seems to be a balancing act between debt and savings. In your opinion, is it better to pay off debt in full, pay it partially and put money away for savings, or save the bulk of your money and only pay the minimum due for debt?

Miller: You should consider several factors, but generally I recommend you pay in full. If you cannot pay off the item in full when you receive the statement, then you could not afford it and probably should not be purchasing. Partial payments may only lead to more debt. How can you save for the future when you are struggling in the present? Consider making a plan to pay down your debt now so that you can enjoy savings and financial freedom in the future.