'Investing' in debt reaps fiscal rewards

January 05, 1992|By David Enna | David Enna,Knight-Ridder News Service B

A lot of people these days are talking about reducing debt, especially their mortgage balance, as a way of getting control of their finances.

Is this a good way of investing your money?

Many financial planners say yes.

"I would generally recommend that any person who has excess cash to invest should seriously consider the advantages of paying off their mortgage early," said Barbara Heilig, a certified financial planner in Charlotte, N.C.

"The most obvious advantage is that you save thousands of dollars in mortgage interest."

Debt reduction is a trend of the 1990s, says Marc Eisenson, author of "The Banker's Secret" (Villard Books, $14.95), an excellent how-to manual on prepaying mortgages. Mr. Eisenson has been promoting the idea of investing in your debt since lTC 1984.

But he points out that your mortgage is the last debt you should try to reduce. "From my point of view, credit-card debt should be eliminated first," he says. "Then pay off your cars. Then turn to your mortgage as an investment."

A mortgage is an awesome financial commitment. Even at 8 1/2 percent interest, a 30-year, $85,000 mortgage will lead to payments of more than $235,000 over the 30 years, almost three times the cost of the original loan.

Prepaying even a small monthly amount -- Mr. Eisenson calls it "pocket change" -- sets off a positive chain reaction.

The loan balance goes down, which reduces the interest you owe, which allows you to pay off your mortgage quicker. Consider:

* Even paying $25 extra a month can produce dramatic savings. On that $85,000 mortgage, paying $25 extra every month will cut 4.2 years off the life of the loan, saving you $25,436.

* Prepaying $100 a month will slash 11 years from the loan, saving you $64,004.

* Prepaying $200 a month will cut 15 1/2 years from the loan, saving you $87,503 -- more than the cost of the original loan!

Essentially, Ms. Heilig says, prepaying is a tax-free investment that earns compound interest at the rate of your mortgage. If your rate is 9 percent, you will earn 9 percent on the amount you prepay, until you sell the house or pay off the mortgage.

"It is a sure thing, no risk," Ms. Heilig said.

"You might be able to get a higher return elsewhere, but with higher risk. That's why people are looking at prepaying right now, because of the interest rate environment we're in. You can't get that sort of return."

A drawback of prepaying is that the money is not liquid -- you can't withdraw it as you can from a bank CD. But you can draw on your investment through a tax-deductible home-equity loan, Ms. Heilig says.

"Once I go through this with people, it's almost a revolution," she says.

Mr. Eisenson adds, "When you get into the swing of debt management, it's fun. You're getting a better return than Donald Trump."

To get a copy of "The Banker's Secret," send a check for $14.95 (plus $3 for shipping) to The Banker's Secret, Box 78, Elizaville, N.Y., 12523. For more information, call (800) 255-0899, Monday through Friday.

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