The Fresh Start Initiative

May 3, 2021

A long time ago, in a galaxy, far, far away, you might have been debt free. Maybe it was before you bought your first car, went off to college, bought a home, or started buying nice things to fill your home. Or maybe it was before you were handed a jaw-dropping medical bill you simply couldn’t afford to pay.

The fact is, if you are in debt, you’re not alone. About 80% of Americans live with debt, according to the Pew Charitable Trusts, so you have lots of company.1

Common sources of consumer debt include credit card debt (75% of adults carry a balance from month to month), personal loans (a quarter of U.S. adults have this type of debt), auto loans (two-thirds have at least one auto loan), and student loans (about one in eight Americans).2

Total up just these sources, and Americans carried an average of $92,727 in consumer debt as of November 2020, a 0.3% increase over 2019.2 That’s not including the 44% of U.S. adults who carry an average mortgage balance of $208,185.2

Similarly, older Americans face their own share of debts, some less and some larger than the national average. For example, the Federal Reserve reported in September 2020 that the median mortgage debt in 2019 among homeowners aged 65 to 74 was $89,000, the highest level since it began charting mortgage debt,3 but still less than half the mortgage debt load of all homeowners. Yet, boomers also carried an average of $34,703 in student loan debt, trailing only their younger peers from Generation X.4

So, what’s the bottom line? On the one hand, you can argue that Americans are used to living with financial regrets, and indeed have used this buy-now, pay-later strategy to attend college, buy homes and cars, start businesses, and live the American Dream.

On the other hand, you wonder if Americans — especially seniors who have retired or live on fixed incomes — wouldn’t benefit from a fresh financial start to help them better manage their debt so they’re not living so close to the financial edge.

It is possible, of course, but before you can wipe the slate clean and give yourself a fresh financial start, you must look closer at your existing debt and how it accumulated. It’s hard to chart progress if you don’t know where you started from.

In looking back, don’t be too hard on yourself. Understand that at one time you might not have had the financial knowledge, discipline, and resolve that you have now to get your financial house in order. Learn from past mistakes but be ready to move on, using the words of the American poet Maya Angelou as encouragement:

I did then what I knew how to do.

Now that I know better, I do better.

The glance back

There’s probably not a person on the planet (outside of Jeff Bezos or Warren Buffett) who couldn’t have improved their financial decision-making at some point, like contributing more money to a 401(k) or investing in Apple when it first debuted to the public at $22 on Dec. 12, 1980. It has since appreciated 18% annually.5  But that was then.

Now, you need to know exactly where you stand financially. You need to know where your money is going and how effectively or ineffectively it’s being used. Setting up a budget and sticking to it can start providing you with solid answers and the clean financial start you’re seeking.

Create a budget

Total the fixed monthly payments you’re making on recurring expenses, such as rent, a home mortgage, utilities, and credit cards, and add them to your variable expenses like entertainment and dining out. Then subtract these monthly expenses from your monthly income. If your expenses are greater than your income and you’re compensating for this deficit by charging up your credit cards, you should see a red light flashing. Like a car out of alignment careening down the highway, you need to get your income and spending in balance or risk ending up in a financial ditch.

Total your debt load

Now that you have a better grasp of your monthly budget, total all your debt balances. Remember that Americans carry a personal debt load of about $92,000. As you run your total, note the interest you’re paying on each balance, for example, student loan debt (5%), car loan debt (7%), and revolving credit card debt (16%). Pay special attention to the different interest rates you’re being charged to borrow.

If you’re paying only the minimums on your cards or you’re not paying them off in full each month, expect to rack up double-digit interest rate charges and endure pay-off periods that could extend for years. Furthermore, maxing out your credit cards (a threshold crossed if your balance exceeds just 30% or more of your credit, according to some), may negatively impact your credit score, making future purchases, including mortgages, far more expensive to finance.

Start negotiating

To reduce your high-interest credit debt, you can certainly get on the phone with your credit card companies and try to negotiate a lower interest rate. Your call may resonate if you have a strong repayment history. If the credit card companies won’t budge, threaten to move your balance elsewhere. This may get their attention because they don’t want to lose a good customer. At the same time, resolve to stop using your credit cards so you won’t increase your balances. When you go shopping, leave your cards at home, cut them up, or freeze them in a block of ice. By the time the ice thaws, hopefully, your urge to splurge will have passed.

That said, these incremental though well-intentioned measures likely won’t slay the big debt elephant in the room unless you have the discipline of a dessert-loving dieter who can stare down a slice of lemon meringue pie. The message here is, don’t impose lifestyle changes so drastic that you run the risk of falling off the debt-reduction wagon, leaving you right back where you started or even further behind.

Make a fresh financial start

So, what’s the solution? As contrary or counterintuitive as it may sound, the solution might require you to tap some of the equity in your home — yes, it’s another loan, but one that can ultimately give you the fresh financial start you desire.

Consider a March 2021 survey conducted by AAG, where nearly half of all senior homeowners said they have paid off their house and live mortgage-free.6 In most cases that’s equity just sitting there that you can put in motion to improve your financial situation. By borrowing against this equity, you may be able to replace relatively higher interest debt (revolving credit card debt, other high-interest loans, etc.) with lower interest debt. Compared with unsecured debt like personal loans, student loans, and credit cards, loans secured by property typically offer a lower interest rate because you are a partner in the transaction. You’re putting up your property as collateral for the loan.  

Although roughly half of older homeowners have no mortgage, you don’t have to be mortgage-free to tap the equity in your home. You simply need to have enough equity in your home for the loan to make sense. If your goal for instance is to reduce high-interest credit card debt, it should give you the money to pay it off or pay it down substantially.  

If you’re under 62, the kinds of mortgages that likely will be available to you include a refinance of your current mortgage or a home equity loan, both of which require monthly repayment of principal and interest soon after the loans close. With a home equity line of credit, you will likely have a draw period for 10 or 15 years, during which you may have the option to make payments on interest only. When the draw period ends, you begin paying back both principal and interest.

While each mortgage requires monthly repayments, each also offers the prospect of replacing higher interest debt with less expensive debt, a primary strategy for achieving a fresh financial start.

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Here’s a summary of how each mortgage works:

Refinance

A refinance pays off your current mortgage and replaces it with a new one. Ideally, your new mortgage will come with a lower interest rate or new terms to lower your monthly mortgage payment. If your home has increased in value, or your new interest rate or mortgage term reduces your mortgage expense, you could also cash out a portion of your home equity and use this cash to pay off high-interest debt. If your credit has improved since you were approved for your first mortgage, you may have a good chance of qualifying for a more favorable interest rate.

Home equity loan

A home equity loan is typically a second mortgage on your home. You receive a fixed amount of money and repay the loan over a fixed term. How much you can borrow is typically limited to 85% of the equity in your home. If your home’s equity has increased, say, $100,000 since you bought it (because of rising home values and paying down the size of your mortgage over time), you may be able to borrow up to $85,000.

Home equity line of credit

A home equity line of credit or HELOC works much like a credit card, but thankfully, it should come with a much lower interest rate. You can borrow as much as you need — up to your credit limit — any time you need it. Because a HELOC is a line of credit, you make payments only on the amount you borrow, not the full amount available.  

The 62 or older borrowing advantage

If you’re 18 or older (in most states), you should be able to apply for any of the mortgages described above. To apply for a reverse mortgage loan, however, you must be at least 62.

Why the age restriction? The age preference was designed to help older Americans on limited or fixed incomes convert some of their home equity into cash without the burden of making monthly loan payments. Despite the absence of monthly mortgage payments, reverse mortgage borrowers must still maintain their homes and pay property taxes and homeowners insurance.

The thinking behind the age restriction was younger homeowners who want or need to tap their home equity have options such as home equity loans, home equity lines of credit, or mortgage refinancing. Plus, they are still typically in their productive earning years, making it easier to make monthly mortgage payments.

A reverse mortgage, like any other mortgage loan, must be repaid, but you can delay repayment until you either pass away or permanently move out of the home. It is this extraordinary repayment option that can provide you with a fresh financial start. To find out if a reverse mortgage loan is right for you, click here.

Right away, you should see your cash flow improve. That’s because a reverse mortgage loan not only pays off your current mortgage, if one exists, but also other liens on your property, such as another home equity loan or HELOC.

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Any remaining equity after these loans are repaid is distributed to you in tax-free cash payments.

So, without the heavy burden of monthly mortgage payments, plus the potential for cash payments, you can focus on paying off big bills, high-interest credit card debt, and other expenses, all of which can position you for a better retirement. As with any mortgage, you do remain responsible for property taxes, maintenance, and homeowners insurance.

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Americans living with debt is not a problem. In fact, it’s as American as apple pie. Rather, debt only becomes an issue when Americans lack the appropriate tools and information to manage it responsibly and strategically.

So, keep reading about personal finance, establish a budget, track spending, invest in yourself, and consult with trusted financial professionals whose insights and perspective can be invaluable to helping you achieve a fresh financial start.

We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature, and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.

Sources

1 https://www.pewtrusts.org/en/research-and-analysis/reports/2015/07/the-complex-story-of-american-debt

2https://www.bankrate.com/personal-finance/debt/average-american-debt/

3 https://saportareport.com/mortgage-debt-rising-among-older-homeowners-metro-atlanta-faces-decisions/columnists/david/

4 https://www.experian.com/blogs/ask-experian/research/baby-boomers-and-student-loan-debt/#s1

5 https://www.fool.com/investing/2019/11/24/if-you-invested-100-in-apples-ipo-this-is-how-much.aspx

6 https://www.aag.com/post2020survey/


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