Should
You Pay Off Your Mortgage Early?
By Martin Lukac
In
the old days, when a mortgage was paid off, it was happily burned.
Those days seem to be long gone. Very few people will stay in their
home for the length of time required to pay of a 30-year mortgage.
And even if you can pay it off early, it might not be best for you.
There
is a sense of security in owning your own home. With every year
that passes, my husband and I say how many years left until we own
this place. By making extra payments on your mortgage, you save
thousands of dollars in interest. Paying one extra payment a year
on a $200,000 mortgage can save you more than $65,000!
That’s
a lot of money.
But
there are lots of arguments out there against paying off your mortgage
early. Long-term mortgage rates are around 7% for most people. If
you deduct the interest paid from your taxes, the actual rate is
closer to 5.1% if you are in the 27% tax bracket. Any investments
that earn more than 5.1% will provide you a better return on your
money.
Many
advisors recommend three different areas to invest your extra money
before paying off your mortgage:
Retirement
It
is recommended that you put your extra money to your retirement,
instead of your home. Make sure that you are taking full advantage
of tax-advantaged savings plans, such as 401(k)s and IRAs. Owning
your home doesn’t mean much if you can’t afford to eat.
Insurance
If
you have dependents, you have to have good insurance coverage. Make
sure that your policy will provide for all of your family’s needs.
Disability insurance is expensive, but a good idea. If you are unable
to work for a long period of time, you will be covered.
Emergency
fund
Most
financial advisors recommend that you have enough money in savings
to cover three to six months of living expenses. This includes your
mortgage payment.
Don’t
even think about prepaying your mortgage if you have high interest
debt elsewhere. Credit cards should always be paid off first. Extra
money should go to the loans with the highest interest first.
Some
homeowners will really benefit from paying off their mortgages early.
If you have a small mortgage and don’t deduct mortgage interest,
the actual cost of you mortgage is higher. Paying off your mortgage
early makes sense.
If
you are paying private mortgage insurance because you owe more than
80% on your loan, you should pay it down as fast as you can. Eliminating
PMI will reduce your monthly payments and gives you a quick return
on your investment.
Many
lenders offer ways to pay off your mortgage early. On our first
home mortgage, we took advantage of a program that took a payment
from our checking twice a month. Each payment was half of the regular
payment. We set it up to coincide with our paychecks and it really
helped us on our budgeting. Because there are 26 biweekly periods
a year, you make 13 monthly payments.
Programs
such as these are convenient and free. Another way to do this is
to take your monthly mortgage payment and divide it by twelve. Add
that amount to each loan payment, and you will be making one extra
payment a year. This will shave years off of your mortgage.
Make
sure that the extra payment amounts are applied to the principal
on your mortgage. You only want to prepay if your mortgage agreement
contains no penalties for early payment. Most mortgages don’t penalize
you.
Paying
off your mortgage early is a good idea, depending on you financial
situation. Look at where you are, where you are going and how you
will get there when deciding where your money should be allotted.
Martin
Lukac, represents, #1 Loans USA (http://www.1LoansUSA.com),
a finance web-company specializing in real estate/mortgage market.
We specialize in daily mortgage news updates, rate predictions,
mortgage rates and more: info@1LoansUSA.com
