It used to be that you worked hard, burned your mortgage and burned the papers in the front yard and partied. That doesn't happen too much these days. Very few people stay in their home long enough today to pay off a 30-year mortgage. If you can pay it off early, it might be the best way to spend your money. There is a security found in owning your own home. With every year that passes, we count how many years until the place is free and clear. You can make extra payments on your mortgage to pay it off quicker and save thousands of dollars in interest. For example, paying one extra payment a year on a $200,000 mortgage, you can save over $65,000. That's a lot of money that you could spend elsewhere. There are a lot of arguments against paying off your mortgage early. Long-term mortgage rates are around 7% for most homeowners. If you deduct the interest paid from your taxes, the actual rate you are paying is closer to 5.1% if you are in the 27% bracket. Any investments that earn more than 5.1% are a better place for your money. Many advisors recommend that you take care of three areas of investment before using your extra money to pay off your mortgage: Retirement You may need to focus your extra money towards your retirement before you pay off your home. Owning your own home won't mean a thing if you have to sell it to afford medication and food. Saving for retirement should especially be important if your mortgage is scheduled to be paid off before you retire anyway. Insurance If you have others dependant on you, good insurance coverage is necessary. Your family's needs should be addressed by you policy. Make sure that you have enough coverage to take care of your family. Disability insurance is expensive, but a good idea. If you are unable to work for a long period of time, it takes away a lot of your worries by providing an income. Emergency fund Having enough money in a savings account to cover three to six months worth of expenses, including your mortgage payment. This will help prepare you for any emergencies that might come your way. For example, if you break your arm and cannot work for two months, your loss of income will be covered by your emergency fund. On the smaller side, a broken dishwasher or vehicle won't stress you out as much if there is money designated for repairs. And don't even think about paying off your mortgage if you have high-interest debt somewhere else. Always pay off your credit cards first. Extra money goes to the loans with the highest interest first as a general rule of thumb. There are some homeowners who really benefit from paying off their mortgages early. If you have a small mortgage and don't deduct your mortgage interest, the actual cost of your mortgage is higher. Paying off your mortgage is a good idea. If you are paying private mortgage insurance because you owe more than 80% of the home's value, you should pay it down as quickly as possible. Eliminating your PMI payments will reduce your monthly payments and gives you a faster return on your investment. Many lenders will encourage the payment of a mortgage early. On my first home mortgage, our mortgage company offered a program that deducted the payments from our checking account twice a month. Each payment was half of the regular payment. Because there are 26 bi-weekly periods a year, you are making an extra payment during the year. If you are paid bi-weekly, the situation can really help you in your budgeting as well. 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 payment you make, and you will be making one extra payment each year. This will shave years off of your mortgage. Make sure that the extra payment amounts are applied to the principal of your mortgage. Make sure that your agreement contains no prepayment penalties. Most won't. I am proud of you if you are in a place where you can pay off your mortgage early. The idea of not having a mortgage payment is a wonderful one. Look at where you are, where you are going and how you will get there before you decide where your money will be going. |
