- The Washington Times - Thursday, December 30, 2004

Many Americans use a new year as an incentive to improve themselves, whether it is a resolution to lose weight, eat more healthfully or quit smoking. I would like to make some suggestions on a few financial New Year’s resolutions.

The past year was interesting. Mortgage rates are only about one percentage point higher than the 40-year lows of 2003. Most experts had predicted that rates would be far higher going into 2005.

These low rates, coupled with rising house prices, continued to fuel cash-out refinances and home-equity loans.

Indeed, Americans are carrying more debt. The higher the debt load, the more important it is to manage the debt responsibly.

Here are some things to think about in 2005:

m Live within your means. This simple rule is probably the most important in achieving financial security. There are lots of ways for someone to spend more than he earns. Eventually, though, it will catch up. If you haven’t done it before, resolve in 2005 to sit down and formulate a monthly budget that includes earnings, expenses and savings.

• Pay off expensive debt before paying off cheap debt. A lot of folks have the perception that paying off their mortgage is the key to financial freedom. There’s certainly nothing wrong with an objective of paying off a mortgage.

Too many times, though, these folks take out a 15-year loan with a low rate and a high payment while they also are carrying significant high-interest credit-card debt.

This is important: Low-interest, tax-deductible mortgage debt is better than high-rate, nondeductible consumer debt.

If you have a mortgage that allows interest-only payments, do something wise with the difference.

Interest-only loans have gained popularity over the past couple of years. The payment on a mortgage with a 30-year amortization will be 20 percent higher than a mortgage that allows an interest-only payment.

Too many people are taking out an interest-only loan for the low payment, but the loan balance doesn’t drop. If you don’t want to pay down your mortgage, you should be increasing your savings rate.

• Don’t use newfound home equity for consumer expenses. If you have a home-equity line or took cash out by refinancing, use the money wisely. It would be much better to spend the money on a capital improvement to your home than on a Caribbean cruise.

• Avoid taking out long-term debt to purchase short-term assets. A classic example: A family opens a $40,000 home-equity line and buys a new car. They get rid of the car after five years but made interest-only payments on the loan.

The result? The asset is gone, and they’re $40,000 more in the hole. This can be avoided by making payments large enough to retire the debt before they retire the vehicle.

Adopting some of these ideas in 2005 will indeed result in responsible debt management and, in turn, greater financial security for 2006.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).

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