SHOULD YOU PAY OFF YOUR MORTGAGE EARLIER?

If you are thinking about retirement in the next ten years or so, you may want to consider paying off your home mortgage earlier.  Certainly, the stock market has offered a way of getting a better return that a bank savings account, but with the recent market volatility, some of your money should be in less volatile investments.  That brings us to paying off your mortgage earlier and saving the interest you are paying on your mortgage, versus putting your money in a bank account that returns far less than your mortgage interest expense.  Most bank saving accounts offer a fraction of 1% in interest.  Even at their lowest point in recent years, mortgage interest rates were 3% and have been going up.  You may want to consider paying off your mortgage earlier and saving the interest.

Here are four ideas on how to shorten the term of your mortgage and save money:

1.                                   1.  Refinance with a shorter-term mortgage.

                       You can refinance your 30 year mortgage to a 15-year loan.  For example, a 30-year fixed-rate

     mortgage  for $200,000 at 4.5%, refinanced into a 15-year loan at 4% five years later, pays off 

     the mortgage 10 years earlier  and saves more than $60,000 (less the closing costs on the           refi). Shorter-term mortgages often carry interest rates lower than their 30-year                              counterparts. Remember, even though you will have a lower interest rate, the quicker payoff          means higher monthly payments. So it’s important to be sure the higher payment works for            you.

       2.Pay a little more each month.

  Just add an extra amount to you regular monthly payment of divide your monthly payment by 12  months and add that amount to your monthly payment for a year.  By doing this  you will make the equivalent of 13 payments in 12 months.  Be sure you indicate that the extra amount is for principal and check that it has been properly applied on your next month’s statement.

       3. Make an extra mortgage payment every year.

   Instead of paying a little more each month, make one extra monthly payment each year. One         way to do  this is to save 1/12 of a payment every month, and then make an extra payment           after every 12 months.  This gives you the flexibility to use the extra savings for something else     if a more pressing expense arises. If you do this every year, on a 30-year mortgage for                   $200,000 at 4.5% you would save more  than $27,000 in interest, and you would pay off the         mortgage four years and three months earlier.

      4. Throw ‘found’ money at the mortgage.                   
  
  Bonuses, tax refunds, gifts, any unexpected windfall, can be used to pay down principal and                     reduce the term and interest of the original loan. An extra $10,000 lump-sum payment on our 
30-year, fixed-rate  mortgage for $200,000 at 4.5% after 5 years, pays off the mortgage two 
years and four months earlier,  and saves more than $19,000 in interest.

    

              Even if you end up selling your home before you pay off your mortgage, you will have more equity in your home and saved mortgage interest.   It’s a strategy worth considering. 

Source:  Tribune Content Agency, LLC