By Brad Stark, MS, CFP®, AAMS®, CMFC℠
Founder and Compliance Chief Officer
Since the financial crisis of 2008/09, we have found that many people are setting out to reduce and manage their debt more wisely than in the past. Because of this, we have compiled five strategies to manage debt and get a stronger grip on their lending relationships.
1. Develop a Relationship With Your Local Bank
Our recommendation is to choose a bank and start developing a relationship. A relationship where you understand what they are looking for and where they recognize what your particular needs are. This is especially true for business owners. Ensure that your needs and financial structure fall within the bank's target lending profile to make sure there is a good fit.
2. Maintain a Good Credit Score
The lending environment is still tight but each year we are removed from the 2008/09 crisis it loosens up slightly. However, lending institutions are still gun shy on making loans (especially quickly) to anyone who does not have exceptional credit, solid cash flow, a good job and plenty of equity in their real estate.
In order to make yourself appealing to banks, make sure you maintain your credit scores by staying on top of all your debt payments. Increase your liquidity (aka “cash”) positions and focus on paying down debts.
3. Structure New and Existing Debt as Strategically as Possible
Many of the old types of loans no longer exist (i.e., interest only, no down, etc.). In many cases, the new terms have shorter interest rate lock in periods, especially for investment real estate. When implementing debt, make sure the terms match as closely as possible to your expected timetable for the use of that asset. Do not necessarily expect that you will refinance something easier a year or two down the road or that rates will be less. That may or may not be the case, but you can’t count on it.
4. Speak To Your CPA Before Attempting to Refinance Your Home
People generally think that you can refinance your house and the interest will be tax deductible. That is not necessarily the case. The IRS has clear rules that you can only refinance your home up to certain levels and still tax deduct the interest unless it is associated with an improvement on that home (i.e., a remodel). And with the passage of the new tax law that caps the interest deduction on new purchases to $750,000 worth of debt, some extra time should be spent here when doing a refinance.
Make sure you speak with your CPA before attempting to consolidate all your other debts and put them on your home.
5. Keep Your Financial “House” in Order
Be organized and be on time with all payments. Increase your reserves and cut unnecessary expenses (cut the fat).
You need to have your financial situation look more appealing to deal with than that of your neighbor. Especially if you want the best terms on loans going forward. Banks have money to loan, they just want to be very careful. As a bank customer, you depend on their financial strength and security as well.
How We Can Help
At Mission Wealth, we have developed a number of banking relationships to help our clients and glad to make a referral. To help the process, we update your Financial plan each year to address any new concerns and to ensure that you are still on track with your goals. This is a dynamic process and we will proactively reach out to you for these updates each year.
In addition, through collaboration with your CPA, we review your prior year’s tax return and discuss any major changes expected to occur in the current tax year. From this, tax minimization strategies may be recommended. At the end of the day, a lower tax burden may lead to improved cash flow and more net income in your pocket. These are just some of the ways we help you to understand and ensure your personal financial security while reducing your financial stress.
Read More: Debt Optimization Strategies
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