Which Bill Do I Pay First?

Question: My mortgage is almost $1,800 a month, my car lease is just under $1,000 a month, and just to keep my credit card balances from growing means another $700 a month. I got laid off last month but luckily found a new job right away.

What stinks is, the new job doesn’t pay as much, and I have zero savings. It’ll take me a couple months for my income to catch up to my expenses, so which bills do I NOT pay for a few months? If I can blow off the mortgage or car loan, I can really get back on my feet.

— Alfred in California

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fast

Questions like these upset and depress me. I’ll explain why as soon as I give you a definitive answer:

Pay your mortgage. Even though it takes awhile, depending on your state, to foreclose, you don’t want to mess with your largest investment — not to mention the only roof over your head.

Pay your car lease. First, call the finance company and politely explain your situation. Sometimes, you can get an extension, but that usually happens only if you’ve already made a half-dozen payments already. Cars can be repossessed very quickly, and I’ve heard horror stories from clients who have had their vehicles towed away after missing a single payment.

Run up your credit cards even more by making the minimum payments. This pains me to say, because I’ve written books urging Americans to pay off — then cut up — their credit cards. However, after a follow-up conversation with you, Alfred, I learned you had none of the usual options.

You have no retirement account to borrow against, you have no equity in your home because you took that out and spent it on a European vacation, and you never even had a savings account.

Your family won’t lend you any money because you already owe them for the down payment on the house, and you didn’t even mention the $20,000 in student loans you’ve deferred but will come back in a big way very soon.

Most people reading this will empathize with being in debt but may doubt some of your choices. Their sympathy might disappear when they learn your previous job paid you more than six figures, yet you not only managed to spend it all, you actually had to borrow to get your house — which is much bigger than you need.

As for the car, you leased an expensive BMW because, and I’m quoting you here, “The women are impressed by it.”

Here’s the bottom line, Alfred: You need help more than you need cash.

In more than two decades counseling people about their debt, I’ve seen your case many times: Otherwise smart individuals who have a blind spot when it comes to managing their money. If you were to win the lottery tomorrow, Alfred, you’d be broke in a few years — because the problem is all in your head, not in your wallet.

So I urge you — and anyone who recognizes themselves in this description — to call a Debt.com counselor today at 1-800-810-0989 for a free consultation. The best way out of this mess is a holistic approach, encompassing not only your credit card debt but also your student loans. At the very least, please read the Debt.com Money Management section to get some idea of where you stand.

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Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask The Expert: Should I Buy A House Or Keep Renting?

Question: I’m freaking out. I’m 30 years old and saved  money even during the recession because I want to buy a small town home and stop paying a landlord. Sadly, my parents are both gone and I got no one to ask for advice.

Of course, the Internet is full of suggestions, but I don’t even know where to start. What are the basics, Howard? How can I figure out if I can afford a place and at what price? And what about hidden costs? I know about homeowners insurance, but what else?

Sorry, I’m losing it over here.

— Wesley in Pennsylvania

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fast

You know more than you think you do, Wesley. Your instincts are correct: Don’t just look at the mortgage payments.

Too many first-time homeowners stretch and buy bigger homes than they need right now because they think they can afford it, it’ll be a good investment, and their family will eventually grow into it. Meanwhile, they haven’t calculated what it costs to heat and cool the place, how much maintenance will be each year (especially if it’s not a new home), and other fees like a homeowner association, insurance, even lawn care.

You, on the other hand, are aiming at a modest townhouse, and you’re deeply concerned (“freaking out”) about cost. That’s actually a good thing, because it also means you have very little debt. In your letter, which I edited for length, you indicated you have $12,000 in student loans, a $1,000 balance on your credit cards, and a car payment of $324 a month.

How does that affect your ability to buy a townhouse at a good price with a reasonable mortgage? The best way to find out for sure isn’t online. I suggest you call Debt.com at 1-800-810-0989 for a free debt analysis from one of our trained counselors. Then you’ll know if those debts are hurting you, how to get rid of them, and how much you can comfortably spend. Good luck, Wesley.

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Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask The Expert: How Do I Help My Broke Mom?

Question: My mother is 78 years old. My father just died, so she will have to live off of $1,100 a month. She owns her house that’s worth around $130,000, but she was turned down for a home equity loan, maybe because her credit card debt is around $37,000. If she sells the house to me — her son — for a dollar, can they come after the house if she stops paying them?

— Gus in Pennsylvania

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fast

This short question is deceptively complex. There’s actually a lot going on here — and that probably means you need to get an attorney involved.

To sum it up before we break it down: We need to address the massive credit card debt, the origins of the monthly income, and the consequences of selling a house for a dollar.

Credit card debt

Given your mother’s income and the balances she’s carrying on her credit cards, I know of no trick in the book that will secure her a home equity loan. While Debt.com offers a do-it-yourself guide to getting out of debt, $37,000 is insurmountable for most folks to go it alone.

When numbers get this high, credit counseling is the best solution. Credit counseling agencies are all nonprofit, and the ones that partner with Debt.com are staffed by certified counselors who have had extensive training and been tested. On the phone, they’ll review not only your mother’s credit card debt, but her overall financial picture. That includes…

Monthly income

You don’t say if your mother’s income is from Social Security, some other source, or a mix of sources. Here’s why that’s important: Your mother may be judgment proof.

Simply put, this means your creditors can sue and win a judgment against you, but there’s nothing to really collect.  Garnish your wages? You don’t have any. Place a levy on your bank account? It’s empty.

It turns out Social Security and other retirement earnings are protected from collections. It also turns out debt collectors can get permission to lien your house. However, your mother will sell hers to you, Gus. Here’s the problem…

 Selling the house

The IRS doesn’t like it when family members sell houses to each other for a dollar. The agency doesn’t consider it a sale as much as a gift. So your mother will get hit with a gift tax — and when you sell the house, you’ll be hit with thousands of dollars in capital gains taxes. That’s because your mother did’t sell the house in an arm’s length transaction to a disinterested third party.

As you can tell from these complicated terms, consulting an attorney is important. Thankfully, Debt.com’s certified credit counselors can help you find one who will represent your best interests. Simply call 1-800-810-0989.

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Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask The Expert: Should I Buy This Home Or Not?

Question:Hi Howard! I’m in a dilemma. I’m 55 years old, have $107,000 saved between two retirement accounts and make net $14,000 a month. I work the oil and gas industry and am very blessed to have a great job!

I have no deductions other than my daughter’s college education expenses for 2015. I am putting $6,500 into a Roth IRA for 2015, but that’s it for now. My employer does not have a 401K plan. I have a SUV debt of $17,000, a motorcycle payment of $525 a month, no credit card debt, and a rental payment for a townhouse of $2,750 a month. My daughter’s education will cost me approximately $25,000 a year.

I’m afraid I don’t have enough deductions and will get hit very hard on taxes this year (25-28 percent tax bracket?). Should I be looking at some real estate (property and mortgage deductions) to offset the amount of taxes I’m going to have to pay?

– Dawn in New Mexico

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fastThe short answer is easy, both for you in this particular case and for any others reading this: Never buy real estate just to save on your taxes.

As a real estate investor myself, I can tell you: It’s a serious commitment of not only money but also mind power. While you need to monitor any investment you make, real estate can be much more time-consuming for  reasons I won’t delve into here.

That said, I asked you some followup questions, and after reviewing your answers, it’s crystal clear; If you want to buy a house to live in and enjoy, buy it now.

You don’t need a CPA like myself to crunch the numbers, because you’re doing so many things right. For starters — and this is the big one — you have no credit card debt. I applaud you for the accomplishment. For others who are reading this, Dawn is one example of what paying off credit card debt can mean. It can mean a new house.

I didn’t work up your complete financial picture, but I urge you to check you debt-to-income ratio with our free DTI ratio calculator. Based on what you’ve told me, I’m guessing yours is well below 41 percent. Anything above that, and mortgage companies will hesitate to work with you — and if they do, you’ll pay for the privilege in higher rates.

You’ve made some mistakes along the way — who hasn’t? — but you seem to have learned from them. If you don’t mind, I’m going to touch on those, because others can learn from what you did wrong and what you’re now doing right…

1. Bad car, good payments

You told me…

“I bought the SUV when my credit wasn’t too good — at a 12 percent rate for six years. I know, stupid, but I’ve been paying an additional $50 a month on it and can step up the payments anytime. On the motorcycles, I pay $527 a month but have started paying twice a month and should pay off the balance of $17,000 in a little over a year.”

You’ve learned the value of a good credit score the hard way — it’s not just a number, it saves you money on interest rates. Paying higher interest rates might not mean higher monthly payments, but those rates can mean many more months of payments. It’s a trap many fall into.

What you’ve done right: You’re digging your way out by saving money and paying off those loans quicker. Keep up those twice-monthly payments, then use that money toward your mortgage.

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2. Seeking the right house at the right price

You told me…

“I would love to own a home on what they call The Western Slope in Colorado. I know taxes are high in Colorado and have even considered a home back in Wyoming, where I’m originally from. A state with no state income tax would be ideal. I don’t need anything more than 1,750 square feet (3 bed, 2 bath with a view!) Cost anywhere between $150,000 and $250,000.”

Since you’re renting a townhouse for $2,750 a month, it’s very likely you can negotiate a monthly mortgage payment for less than that, even with taxes, insurance, and any homeowner fees included.

What you’ve done right: You’re being logical about your first home purchase instead of emotional. You’re reasonable about how many square feet you need rather than want. You’re even willing to relocate to save money.

What to do now

As you start the house-hunting process, be sure to use our Mortgage Repayment Calculator before signing on the dotted line. However, you’re in a good place, Dawn. Soon, you should be in your own place!

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

How to Buy a Home after Bankruptcy

Build the right strategy for mortgage approval.

Make a plan to invest in a home

The negative credit impact of bankruptcy stays with you for years after the date of final discharge – up to ten years, to be specific. But that doesn’t mean that you have to put your life on hold for the next decade.

In fact, with the right strategy you can even qualify for one of the toughest types of financing to get approved for… a mortgage.  So you can get a new home that meets your needs and works for your budget, too.

The information below can help you craft the right strategy to get your credit and outlook ready for mortgage approval.  If you have questions or need to connect with the credit services described, we can help. Call us or complete the form to the right to tell us what kind of assistance you need.

Step 1: Set a date

The first step to get ready for a mortgage after bankruptcy is to determine exactly how soon you want to buy. Ideally, you need about one to two years to build credit and prepare your finances for loan approval. Given new lending standards required following the real estate market collapse in 2009, you may find it downright impossible to qualify if you don’t give yourself that time and do the work described below.

That being said, you may have a need to move sooner. If the bankruptcy filing put an automatic stay on the foreclosure of your home, you may need to sell the property quickly and downsize. In this case, instead of immediately pursuing a new mortgage, the best option may be to find a rental property for a few years so you can really get ready to buy.

Step 2: Review & repair your credit

Following severe financial distress that leads to bankruptcy, your credit profile may contain a large number of negative items – both correct and incorrect. Completing a bankruptcy should discharge the remaining balances on your debts, balances should be zeroed out and collection accounts should be closed.

With that in mind, you need to review your credit report to make sure everything has been updated correctly following the completion of your filing. If you find items that you think are outdated or need to be removed, then you should consider going through the credit repair process.

Step 3: Take steps to build credit

You can offset negative information in your credit report that can drag down your credit score by taking positive actions for your credit. This means that following bankruptcy, you can take steps to rebuild your credit long before the bankruptcy penalty expires and the item gets removed from your profile.

The first step to rebuilding credit is usually to get a secured credit card. This allows you to get credit with a deposit, so your credit score isn’t really a factor to qualify. Then you make charges strategically and manage the debt closely. Every positive payment you make helps you build credit. You should also make an effort to maintain the balance at no more than 20% of the total credit line you have available.

In addition, make sure to keep up with payments on any other debts that you have. This includes student loan debt that doesn’t get discharged during bankruptcy, as well as the payment for any small personal loans you may wish to take out to help you rebuild your credit. Then you can move on to the steps that follow while you work to build your credit

Step 4: Set a budget & start saving

Financial stability will be key to getting from bankruptcy completion to mortgage approval, so you need to build a formalized budget if you want to be successful. And luckily, budgeting isn’t as much of a hassle as you might think.

Find a budgeting platform that makes it as easy as possible to build a budget. Once you have your accounts entered and expenses categorized – which should take less than an hour even if you get really detailed – you can see how much free cash flow you have available to save. Remember that you need as much money as possible for a down payment, so the more you can save each month for the next 12-24 months, the better.

Step 5: Maximize your down payment

Speaking of down payment, the more money you have for a down payment, the easier it usually is to qualify for the mortgage you want. Ideally, you want at least 20% of the purchase price of the home. This will allow you to qualify for a traditional mortgage, instead of depending on riskier options like ARMs.

Of course, bear in mind that you may be able to qualify for an FHA-loan for as little as 3% down. But your goal should be to hit the 20% mark in order to make it easier to qualify.

Step 6: The right home, the right price

Allow Steps 1-5 to work. You should be building credit by making strategic purchases and managing your debt closely. You should also be moving all free cash flow into savings to maximize your down payment. The more aggressive you are at doing these two things, the faster you can usually get to where you need to be.

After about 12 months of hard work, you can start the process of buying a home. But that doesn’t mean you get an agent as start making offers. You need to take a lot of time to define what you need in a home, where you want to live, and how much home your can afford. And make sure the amenities and home features you think you need are really things you can’t do without.

Use a mortgage calculator to figure out the size of mortgage you can get without struggling to make the monthly payments. This will help you set the right target price range.

Step 7: Check your credit score

The last step you should take before you start actively looking and making offers. Check your credit score. You can purchase one of your credit scores through a credit bureau or you can enroll in a credit monitoring service to get your scores from one or three bureaus.

Fact: In most cases your credit score needs to be around 650 at minimum to qualify for mortgage approval.

Remember, you usually won’t need this service forever (unless you want to keep it for your own peace of mind) so typically only need this for a few months while you make sure your score is as high as possible before you go to apply for a loan. Using this strategy, you can make sure your credit score is maximized, then go to a lender to get the mortgage pre-approval you need to make the search for your new home easier.

Ask The Expert: What Should I Do With Extra Cash?

Question: My father died recently, thankfully at a ripe old age. He was a great guy, and he left me and my brother $10,000 each.

My wife wants me to use my money on paying down our mortgage, but I’m thinking I should invest it in retirement – I keep reading on your site about how important that is, and most of us stink at that.

So which one should I do, Howard?

— Joe in Indiana

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fastFirst, Joe, my condolences about your father. He obviously raised you right — you’re being responsible about this inheritance.

Your question is my favorite kind, because either option you go with, you’ve won. However, one option may indeed be better than the other.

First, let’s set the scene in this video, then dive deeper into your options…

How to decide

As I mentioned in the video, you can pay off your mortgage years early if you make two payment a month instead of one. In fact, I once detailed the pros and cons of a 15-year mortgage over a 30-year mortgage.

However, I also mentioned in the video: Some employers match a percentage of your 401(k) contributions up to a certain amount.

If your employer offers any kind of match, I suggest you alter your payroll deduction to the maximum it matches. Why do this over paying down the mortgage? Because you’re getting free money. This is part of my crusade to help employees make more money from their bosses.

Either way you go, Joe, you can’t go wrong!

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Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask the Expert: What’s Better For Me? 30-Year Mortgage Rates or 15-Year Mortgage Rates?

Question: I’m sick of renting and dealing with landlords and loud neighbors. I’ve been saving for a house and now have $9,000 for a down payment. I have a good steady job. I recently paid off my credit cards just like you always talk about. I’m looking for houses and researched how the home-buying process works.

But one thing I can’t figure out: Is it better to do a 30-year mortgage or a 15-mortgage? Everyone I talk to says different things. I know I’ll pay more interest with 30-year mortgage rates, but I’ll have lower payments than a 15-year. What would you do?

— Cassie in Texas

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fast

I can’t answer your questions, Cassie, without posing a few of my own…

1. On a 15-year mortgage, will your monthly payments total no more than 28 percent of your monthly income? That’s what my friends at Bankrate suggest, although I’d prefer you keep that number to 25 percent.

2. Do you have any other big debts you’re paying off? For example, do you have a big auto loan? If so, that interest rate is surely much higher than on your mortgage. I’d lean toward the 30-year mortgage until you pay off that car and save some money. (See below.)

3. Do you have an emergency fund? Financial experts differ on this point, but if you don’t have enough money in the bank to cover your monthly expenses for at least a couple months, it makes no sense to save interest on your new house when one bad accident or illness will send you to the poor house.

4. Are you contributing to your retirement? Even if you’re just depositing $25 into a MyRA, it helps. I don’t know how old you are, Cassie, but it makes no sense having your house paid off in 15 years if you’re retiring at the same time with no money to buy food.

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Running the numbers

Once you answer those questions, try Debt.com’s Mortgage Payment Calculator. It will graphically show you how much you’ll pay in interest, what your monthly payments will be, and when you’ll pay off the loan.

It can also show you how much you can save by making an extra payment — which is an important consideration. If you settle for the 30-year mortgage but find yourself with extra money at the end of the month, you can always make a mid-month payment.

Also remember: Nothing, not even mortgages, are forever. You can always refinance later if rates are better and you find you can afford to make steeper monthly payments.

If you’re on the cusp and unsure if you can handle this debt on top of your others, call us for a free debt analysis at  1-800-810-0989. If nothing else, our counselors can confirm your decision and help you sleep better at night.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Should We Rent or Buy a House?

Question: My wife and I are new to the area and wondering if we should jump right in and buy a house or rent. I hate to rent because I think we are throwing our money away. What do you think?

— David 

Steve Rhode answers…

Steve Rhode on how to get out of debt fastI can certainly understand the idea of pride in ownership and the desire to buy a house to feel like you have a place that is all yours.

On a more practical note, let’s talk about the reality of ownership. Unless you pay cash, buying a home results in a big mortgage on the property. You really don’t own the home. The bank has a huge lien against the property and can take the house from you if you don’t make your payments.

A real estate lawyer gave me some advice years ago that makes it very clear what my rights are as a homeowner with a mortgage. He said, “You’ve got to pay to stay.” If you really owned the property, nobody could kick you out.

Home ownership comes with a whole host of other obligations as well. You have the upkeep and maintenance of the property, maybe some homeowner dues, taxes, insurance, and then there are those dreaded household emergencies that cost a fortune. There is never a good time for your hot water heater to go or a tree to fall on the house.

Owning real estate can have some long-term advantages, like appreciation (hopefully). However, you also have to consider how much of a return on your investment you will receive before you have to or want to sell the home. Real estate commission costs add up to big bucks. And speaking of those costs, let’s not forget all the closing costs associated with getting the mortgage to begin with.

Renting, on the other hand, can be significantly less expensive when you consider all the above costs. You should stop thinking of renting as throwing your money away and start thinking of it as possible less expensive housing that gives you flexibility.

When you are new to an area you don’t always know the final place you’d like to live. After being there a while you might just find a certain part of town works better for your needs or commute. Spending a little time to get to know the area before you leap into a purchase makes sense.

A general rule of thumb is if you don’t plan on living in a place for more than five years then renting might be the best bet financially. But another consideration is to consider how much money you’d lose buying and selling a property in a shorter period of time.

Renting has a cost. If you rented a house for $2,000 a month for four years you’d pay $96,000 in rent. So you’ll need to consider if you bought and sold a house, with all its associated expenses and broke even, you’d come out ahead $96,000 in rent you did not have to pay.

The flip side is if the home did not appreciate enough to pay the selling real estate fees and costs then you’d have to come up with extra cash to get out of the house. In this case, renting has a cost but more flexibility.

For more on this subject, see this article and use the buy vs. rent map to see what the recommendation is for your specific area. if you decide to rent, check out 7 ways to beat the high cost of rent.

Steve Rhode is the Get Out of Debt Guy. He’s been helping people with personal finance troubles through advice and education since 1994. If you would like to ask a question, visit Get Out of Debt and let Steve help you for free.

Should I Be Bringing Down the House Payment?

Question: My wife and I have no children and a modest lifestyle. We pay off our credit cards every month, and we bought our equally modest cars in cash (a no-frills Toyota pickup and a Chevy Malibu).

So what could possibly be our problem? We fight over money — not over the money we don’t have, but the money we do. I want to make an extra payment on my mortgage, while she says she’d rather put it in a savings account. I say we’ll save more in the long run, but she doesn’t like the idea of paying any more than we have to.

Who’s right? Me or her?

Michael in Miami

Howard Dvorkin CPA answers…

Howard Dvorkin on extra mortgage paymentsFirst of all, congratulations on living within your means. That’s not easy these days, with a constant barrage of credit card offers in the mail, as well as TV commercials trying to convince you to buy things you don’t need.

Second, you should know that your problem is not unique. In almost three decades of counseling couples, I’ve witnessed many fights about money. But these should never be personal. It should be about the math. Let’s look at your math.

What you pay, what you earn

You told me separately that your mortgage interest rate is a very enviable 4.35 percent. You also have a money market account that earns a paltry 0.8 percent. So right away, you can tell your wife: If you pay down your mortgage faster, you’ll save much more on interest payments than you’ll earn in interest — almost six times more.

Exceptions to the rule

When it comes to saving money, however, nothing is quite that simple. Here are four questions to ask yourselves before you pay a mortgage off early:

1. Do you have student loans? If those loans have higher interest rates than your mortgage, pay those down first. But if you’ve consolidated your student loans and the monthly payment is less than the mortgage, go ahead.

2. Do you plan to move soon? If so, you may need that extra cash for a new down payment and moving expenses.

3. Are you saving for retirement? You can earn much more than your mortgage on even modest retirement plans like the 401(k)s, Roth IRAs, and the new MyRA, which all come with significant tax breaks. (A separate but related issue: I always advise couples to pay off their mortgage before they retire.)

4. Do you have an emergency fund? This is perhaps the most important question you can ask yourselves. It makes no sense to pay down a mortgage when you don’t have enough for unexpected developments. As I wrote in my book Power Up, “The rule of thumb about an emergency fund is to accumulate at least six months of your household expenses. This is a nice theory, but it falls short in practicality.” So even 1-2 months is a notable achievement.

After speaking with you, I learned you have no other debts that outpace your mortgage, and you aren’t planning to move. You said you read my book and have that emergency fund. So my final answer is:

Yes, you’re right, Michael. Make that extra mortgage payment whenever you can.

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Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

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