Reduce and Eliminate Interest Expense

I have worked on thousands of tax returns in my 37 years. The people who do well financially are the people who earn interest income rather than paying out interest expense. Credit card interest and car loans are both terrible and should be avoided at all costs. They are at a high interest rate and are nondeductible. Student loans aren’t so bad. They can sometimes be at very low rates and are deductible. The rules have been changed allowing you to deduct more of your student loan interest.

Mortgage interest is hard to avoid, but can be minimized. Make extra principal payments, even small amounts. The interest expense saved on just one $50 dollar extra principal payment at 7% for 30 years is $105. That is without compounding. Paying early each month can also help. Splitting payments where you pay half on the 1st of the month and half on the 15th of the month can cut years off a 30 year mortgage. Be sure your lender understands what you are doing and approves it. Some lenders have rules that do not allow these types of payments. Of course, 15 year mortgages are better than 30 year. But the monthly payment goes way up too. Some people can’t afford that large of a payment.

If you need a car loan, or have other debts, look into a home equity line of credit. You get a tax deduction and usually a lower interest rate.