No one enjoys being in debt, but paying off a mortgage, car loan, credit cards, and other large expenses can seem like an overwhelming task. According to financial expert Dave Ramsey, the trick is not to become so discouraged by the total of all debt that you do not even try to improve your financial situation.
What Ramsey recommends instead is to focus on one debt at a time by directing all extra funds to pay off a single account. You can prioritize your debts for payoff however it makes sense to you. Some people start with the smallest debt to achieve a sense of satisfaction when they pay the account in full. Others focus on their account with the highest balance or interest rate.
This repayment plan, often referred to as the snowball method, has helped thousands of people get out of debt and remain debt-free from that point forward. You may need to tighten your budget or take on extra work to have funds available to pay off your debts. While only you can decide if the sacrifice is worth it, most people who have gotten out of debt via the snowball method would recommend it to someone else.
How to Pay Off Your Mortgage Early
If you have a typical 30-year mortgage and only pay the required amount each month, it will take years for most of your payment to go towards the principal balance rather than interest. Financial expert Dave Ramsey gives the example of a couple who purchased a home with a 30-year mortgage for $330,000. By making one additional mortgage payment per quarter, this couple would save over $65,000 that would have gone towards paying interest on their loan. They would also pay off their mortgage in 19 years instead of 30.
Be sure to check with your mortgage banker before you start directing additional funds towards paying off your mortgage early. Some banks may impose early payment penalties or may only be able to accept additional payments at certain times of the year. Once you have the go-ahead to put extra funds towards your mortgage, make sure that your bank understands that any money above the expected monthly payment should go towards principal rather than advancing the due date of your next payment.
Refinancing your current mortgage is also an option for lowering your monthly payment. However, you need to carefully consider the fees you would need to pay to do so. In some cases, the fees to refinance a home mortgage can be nearly as much as it cost to obtain the original mortgage. Be sure to shop around and compare interest rates if you plan to pursue this option.
Paying Off Your Car Loan Before the Due Date
Maybe you had poor to average credit when you took out your car loan but now have a score in the good to excellent range. You can take advantage of this situation by using your improved credit score to obtain a better interest rate on your car loan.
An effective way to start this process is to see if your current lender will agree to obtain a new credit report and give you a better rate. You can also obtain car loan rates from local banks and credit unions and use that number to negotiate with your current lender.
The car loan will end up costing you less if you obtain a lower interest rate. Just be careful not to undo your savings by extending the life of your refinanced auto loan since it would take you longer to get out of debt.
You also have the option of applying the snowball debt repayment method to your car loan. You just need to put as much extra money as you have each month towards the principal without extending the due date of future payments.
Steps to Eliminate Credit Card Debt
Reducing or eliminating your credit card debt can be even more challenging than paying off larger loans like your home or car. One reason is that you likely have to deal with several creditors. Another issue is that credit cards are revolving accounts that you can use repeatedly without ever getting the balance to zero. Revolving debt typically comes with a much higher interest rate than the interest charged on installment accounts, such as your mortgage and personal loans.
You may need to do some soul-searching to figure out how you got into debt in the first place and commit to better financial habits. The snowball method works just as well for credit card debt as installment loans. You can also consider consolidating your revolving debt into one loan or transferring the balance of one credit card to an account with a lower interest rate.
