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Tuesday, April 8, 2014

Does it make sense to pay off your mortgage early???

Buying a home is one of the biggest investments of a lifetime, but does you want to be paying for it for the rest of their life?

Of course not!

Which begs the question: If a homeowner has the means, is prepaying your mortgage a good idea?

Most of the time, it is.

Homeowners who have the means to pre-pay, can save a substantial amount of money in interest, shorten the length of the loan, increase the equity in the home and own it outright sooner.

But before you start writing checks to the mortgage company, there are a few things to compare to ensure the money wouldn’t be better used elsewhere.

 First:  Do you have any other debt?

It makes a lot more sense to pay off first any debt higher than their current mortgage rate and (of course) and is non tax deductible.

Second: Is your retirement plan on track?

For most Americans their home is the large part of their retirement program.

But if the homeowner isn’t maxing out their retirement account contributions prepaying your mortgage isn’t something to consider just yet.

Third: Do you have an emergency savings account?

Most families need between six months to a year’s salary in an emergency fund before they should consider prepaying their mortgage.

For those homeowners in
good shape financially, consider this:
By making just one extra mortgage payment per year, homeowners can substantially reduce the total cost of your loan.

For example: A homeowner who borrowed $100,000 on a 30-year loan at 4 percent, the monthly payment would be $477.

By making 13 payments a year instead of 12, homeowners save over $10,000 in interest over the life of the loan and reduce the total loan term by four years.

Doubling a mortgage payment, you could  pay off that same 30-year loan in only 11 years.

Editor’s note: When writing a check to the bank for the extra payment, it’s important to mark on it that you want it to be applied to the principal.

Otherwise the lender may apply the extra payment to interest, and paying interest in advance does not earn you any more equity in your home. But do your homework.

The Cons

Remember that prepaying a mortgage isn’t the best option for everyone.

 And in addition to making sure that your other higher-interest, non-deductible debts are paid first and your retirement and emergency savings accounts are in order, there are a few other reasons why you might not choose to prepare your mortgage.

If the mortgage rate is extremely low, it might be better to use the liquid cash for other investments with a higher rate of return. (stock market) or a property investment that has a higher rate of return over time.

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clear skies,

Doug Reynolds




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