Money Magazine’s cover story answers the question, “What to do with $1,000?”.   They give a list of 11 different things you could do with an extra $1,000. All the answers they gave have some merit, but I feel the bigger point was missed.  If you wait until you have an extra $1,000 to decide what to do with it, you will probably make the wrong choice.

I believe there are financial priorities that can apply to most everyone.  They are:

1. Emergency Cash
2. Eliminate short term, non tax deductible debt
3. Protect what you have and what you hope to someday have
4. Save for long term goals (education, retirement, etc)
5. Pay off your house.

By having a preplanned priority for your money, you will always be ready when money comes to do the most important thing with it.  As I studied finances, and thought about priorities for money, I decided that there are in fact, near-universal priorities.  For example, cash in the bank (#1) is more important than paying off your house (#5).  Paying off credit card debt is more important that saving for future college education expenses.

When creating a mortgage plan, or deciding what to do with an extra $1,000, having these priorities figured out ahead of time allow you to make better financial decisions.

If you make better financial decisions, you will have  a better chance at succeeding financially.  Decide ahead of time what the priorities are for your money to make better decisions.

Check out the presentation here to get more details on my financial priorities system.

If you find yourself in a situation where you have equity available in your house, and also have a bunch of other debts, such as credit cards or auto loans, you may consider refinancing and rolling the debts into the new mortgage.

Most people will tell you not to do a consolidation loan, but, like so many other things, “It Depends”. 

There is a right way and a wrong way to roll your credit cards or auto loans into your mortgage.  First, the wrong way – if you simply get a larger mortgage and spread out your payments on your 3 year old car for 30 years, you are probably making a mistake.  More importantly, why do you have the other debts?  Are they from a specific event or cause, such as a medical emergency, or are they a result of a lifestyle that consistently out-spent your income? If your accumulated debts are just a habit, then rolling all the debts into a new mortgage will likely leave you with a bigger mortgage and more credit card debt just 2-3 years later.  You will be worse off than if you never refinanced.  However, if you can point to a specific cause of the debts, and can show a track record of reducing those debts over the last 6-12 months, then you may be able to refinance and benefit from lower, tax-deductible interest payments rather than high interest rate credit cards.

The Right way to consolidate your debts into your mortgage:

First, know the reason the debts are there – if you can’t tell why you have the debts, then paying them off will not stop them from re-appearing.  In fact, you will go back into debt if you are in the habit of using credit cards to get by.

Second – know what your amortization schedule looks like.  From an amortization schedule you can see how long it will take for the added debts to be paid off.  The Amortization schedule will vary based on the term of the loan and the interest rate.  As an example, take a look at the table below.  This is for a $200,000 mortgage. 

You can’t control the interest rate – the market sets that, but you can control the term.  The real difference is with shorter loan terms – using a 20 year term pays off the $25,000 addition in just 3.8 years and a 15 year mortgage pays off $25,000 in only 2.5 years!

Third – Accountability.  If you are going to pay off debts and more importantly, stay out of debt, an accountability system is critical.  Usually this would be a financial planner or advisor that regularly reviews your finances with you.  Accountability can also come from an annual mortgage checkup with a mortgage planner.  When we review a client’s mortgage, we look at the credit report changes over the past year, the performance of the mortgage and the value of the house.  If debts are creeping back in, immediate changes need to be made to keep the plan on track.

Debt Consolidation Mortgage Power Play:

The absolute best way to consolidate debts into a mortgage is to use the shortest mortgage term possible.  By eliminating credit card payments or auto loan payments, the shorter term and higher payment of a 15 or 20 year mortgage suddenly becomes affordable.

In this example below, a client used a 15 year mortgage to pay off $28,000 in credit cards and car loans.  By eliminating the credit card and car loan payments, the borrower was able to use a 15 year mortgage and rapidly build equity in their house.

 Even is this borrower needed to finance a new car in a few years, the added equity in their house would exceed the new auto loan liability.  The usual outcome, however, is that once the habit if credit cards and auto loans is broken, a person finds it easier to save, so they are able to pay cash for future cars.

 So, before you listen to the pundits that tell you to never roll your debts into a mortgage, consider the effect of the amortization schedule, the loan term, and the reason the debts exist and make the best decision for yourself. 

This is another example of why I tell people to “Start with the House” to reach financial freedom.  If you have  a sound plan for consolidating debts into a new mortgage, you can build wealth and find yourself debt free faster.

If you want to boost your credit score fast – there is one best way.  Credit scores are a prediction of how likely is someone to default on an obligation.  So, if you do anything that is similar to what people did in the past prior to defaulting, it increases your risk of default and lowers your score.

To always keep a great credit score, don’t do anything that others have done prior to defaulting.  So think about that for a second – if I was going to be 90 days late on an account, what would I do 120-180 days prior to that?

I would have my credit report pulled to try and get more credit.  Then the new accounts would show up on my credit report.   I would max out my existing credit card accounts.  Lastly, I would start missing payments.

I can have my credit report pulled for any reason, I can open new accounts for any reason, and, if I was careless, could even have a late payment once in a great while and still not be in trouble.

If I max out my credit cards, however, I am either in financial trouble or I am using 0% cash advance credit card to put some money in the bank.  The Credit scoring model(www.myfico.com), however, assumes I am in trouble. 

Knowing this, there is only one way to increase your score fast – and you don’t have to pay someone to fix your score.  Keep all your credit cards at a 30% or less ratio of the amount owed versus the maximum limit.  If you have a maxed out credit card, and then pay the card down to 30% or less of the limit, you will bring your score up dramatically in 30 days or less.

The credit scoring model looks at all your cards’ limits and balances.  So, keep the total amount you could borrow high (Don’t close old accounts) and keep the amount owed low overall and on each card.