To Pay Off or Not Pay Off Your Mortgage?

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Do you ever sit at your desk, paying all the bills, dreaming of a life without mortgage payments? It’s kind of like dreaming about winning the lottery. Wouldn’t it be nice to rid yourself of the most significant monthly bill you have?

Have you thought about paying off your mortgage early? If so, have you asked yourself the following questions?

  • How’s my emergency fund? You’ve heard about this, right? Experts recommend having at least three to six months’ worth of living expenses in some type of easily accessible account blah, blah, blah. If you’ve yet to take the advice of experts, don’t even think about putting any extra money toward your mortgage. It’s money you won’t be able to get back quickly in case of an emergency. Create that emergency fund first!
     
  • Are my credit cards loaded? If you have a high balance on your credit card(s), pay off that high interest debt first. They don’t call it toxic debt for nothing. Cleanse your financial system of this debt before you consider putting any extra money toward your mortgage.
     
  • How’s my retirement saving going? Researchers found when using Federal Reserve data* that investors would have earned 11-17 cents more on the dollar by investing in their company’s 401(k) plans rather than by paying extra on their mortgages. Why? Because you pay off your mortgage with after-tax dollars while so many retirement accounts are funded with pre-tax dollars. If your retirement savings are on the slim side, make contributions there before paying off a mortgage.
     
  • How close am I to retirement? If you’re close to retirement, a better argument can be had for paying down your mortgage early. After all, no mortgage payment erases a big drain on your retirement nest egg. You can also look at your investments. As we approach retirement, standard investment wisdom has our investments more conservative. This means your rate of return is lower and easier to beat by paying down your mortgage.
     
  • How’s my psyche? A 2010 Employee Benefit Research Institute survey declared that 16% of workers and 10% of retirees think making mortgage payments is the most pressing financial issue facing Americans. If monthly mortgage payments just make you nervous, perhaps paying off your mortgage early is a good thing for your peace of mind.

O.K., so you’ve decided that paying off your mortgage early makes sense for you. How do you go about doing it?

First, check the terms of your loan contract to be sure there’s no penalty for early payoff. You can figure out how much you can save by using an amortization calculator.

Here are some prepayment options:

  • Monthly prepayments—Round up your payment to an even number, such as the next $50 or $200. Add the extra amount into each check. Be sure to inform your loan company the extra should go toward principal. According to mortgage industry publisher HSH Associates, if you have a $100,000, 8 percent, 30-year loan, prepaying just $10 per month will carve 19 months off your term while saving you over $10,000 in interest.
     
  • Occasional prepayments—Here you can make an additional payment(s) when you have the funds, say a bonus payment or two of principal and interest. Two such payments could trim about nine years off a 30-year mortgage.
     
  • Biweekly Payments—Though Vantage only allows monthly payments to be made, some lenders allow you to set up biweekly payments, meaning you’ll make two payments per month. Because there are 26 biweekly periods per year, you’ll be making 13 payments per year. And you know what that means...quicker payoff!

Here’s something else to consider when deciding on prepaying or not––many homeowners find the tax deduction from the interest costs of their mortgages rather attractive. There are two things to think about here. 1) This benefit applies only to taxpayers who itemize beyond standard deductions. 2) The greater interest expense comes early on mortgages as you pay more principal than interest later in the mortgage, reducing the tax deduction.

Here are some ideas for freeing up money to help pay off that mortgage early.

  • Refinance. If you’re still at a higher interest rate, now’s the time to refinance. Rates are still low. If you lower your monthly payment, you can keep paying your current amount with the difference taken from your principal.
     
  • Second Job. Consider taking a part-time job and using all your earnings from that position to pay down your mortgage.
     
  • Move. If you have a lot of home equity, sell your current home and move to an area (or home) with a lower cost of living where you can finance a purchase mortgage free.

Don’t forget, Vantage Credit Union’s wholly-owned subsidiary, Mortgage Solutions, LLC, offers many options related to home-buying, from a variety of mortgage loans to refinancing to applying online. These trained professionals are ready to help you come to a responsible decision regarding your mortgage options.

Also, if you’re thinking new home rather than payoff, take advantage of our Home Buying Workshops. The next one is scheduled for March 16, 2011.

* University of Texas/Austin research paper; mortgage prepayments vs. retirement savings. Clemens Sialm; associate professor.