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! Thats 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 doesnt mean much if you cant 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 familys 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. Dont 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 dont 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 dont 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. |
