business advisor
Reduce Your Debt
With interest at record lows, now's the time to lower your borrowing costs. Consider these strategies.

By Jerry Hayes, O.D.

With bank prime and mortgage rates at near record lows, there's no better time than now to reduce personal and business debt by securing low interest loans. Outlined below are several strategies to help you lock in low rates and deduct your interest costs.

Refinance for a better rate

Anybody who has a home or office mortgage rate higher than 7% should look into the feasibility of refinancing. Fifteen-year rates are currently at the 6.5% to 7% range in most parts of the country. Plus, competition between lenders has significantly lowered closing costs.

Now is also an excellent time to consolidate your higher interest loans such as credit cards, student loans and home equity lines.

Not only can you lower your rates, but consolidating has the effect of converting non-deductible interest into fully deductible interest.

Even if you can't lower your rate by much, this is a good time to convert an existing adjustable rate mortgage (ARM) into a fixed rate, thereby taking some risk out of your current loan.

Re-evaluate your mortgage term

If you have a 20- or 30-year mortgage at a high rate, consider reducing the term of your loan to 15 years. A shorter payment schedule allows your equity to build up faster and reduces your overall interest paid.

Even if you're able to get a lower rate, some experts recommend sticking with the 30-year mortgage, taking what you save on your monthly payment and investing the difference.

However, the wisdom of that advice is totally dependent on your ability to actually save the money rather than to spend it. If you're a highly disciplined saver and you think you can do well in investments over time, go with the 30-year mortgage. Otherwise, use the 15-year mortgage as a forced savings plan.

Establish an equity line of credit

Once you refinance your home or office, it's a good idea to take out a standby line of credit in the range of $50,000 to $100,000. This can provide liquidity in the event of a financial emergency and avoid non-deductible interest charges such as medical bills, credit card loans and student loans.

Pay off debt with low-yielding investments

If you have a substantial money market account that's yielding a small return, use that to pay off any loans you might have at a higher rate. For example, let's say you owe $300,000 on your office building at 10% and your CDs are yielding 3%. You could take the money out of the account, pay off the loan and save yourself $21,000 in the pre-tax interest per year.

However, I want to be on record as saying that I'm not usually a fan of taking money out of savings to pay practice debts. This looks good on paper, but it reduces your liquidity and financial flexibility. We'll discuss this further in a future column.

Pay the highest debts off first

This is logical but not always obvious. Make sure you pay off the debts with the highest interest rates first. For example, don't prepay a home mortgage loan with an interest rate of 7% if you also owe money on high-interest credit cards or car loans.

Credit is a wonderful tool if you use it properly. Just don't borrow more than you can comfortably afford to repay and make sure to shop for the best rates.

A frequent writer and speaker on practice management issues, Dr. Hayes is the founder and director of Hayes Consulting.  You can reach him at (800) 588-9636 or JHAYES@HAYESCONSULTING.NET.