Paying Off The Mortgage

With the crazy stock, real estate and financial markets, many of us are concerned about paying off debt. And one of the biggest areas of debt is the home mortgage. Should you pay off your mortgage? As usual, the answer depends on your personal situation.

First, you should determine whether paying off your mortgage early is a good idea. Your mortgage is the last debt you should pay off, before credit cards and auto loans. The government tax deduction for mortgage interest makes many mortgages one of the best financing deals around. A 6% mortgage rate could effectively be 4.5% after taxes, depending upon your tax bracket and deductions. As long as your mortgage payment is comfortable and your interest rate is fixed at a competitive rate, consider using extra cash to invest somewhere else – in real estate, a small business or the stock market. And don’t forget to fund your emergency cash account to protect you in case of disability, illness or job loss. The conventional thinking is that 3 months of salary should be socked away into a reserve account, but with the uncertain financial times, 4-6 months seems more prudent.

However, if you are nearing retirement, having mortgage debt is generally not the best idea unless you are fortunate to have enough pension or retirement savings to afford your payments. Most retirees will have a restricted income, at a lower tax bracket. Even with a more ample pension or retirement account, many of us will want to have the security of living in a home that is free of any debt. You can’t put a price tag on being able to sleep at night when you know you are debt free.

An easy way to pay off your mortgage early is to make additional monthly principle payments. Let’s say you are 55, with 10 years before retirement. You have a 30 year mortgage you took out 15 years ago for $200,000. The interest rate is 5%. If you pay $100 extra per month, you’ll pay off the mortgage in 13 years and 3 months, when you are 68. If you pay an extra $200 per month, you’ll pay off the mortgage in 11 years and 10 months, when you are almost 67. To pay off the loan by age 65, you’ll need to pay an extra $370 per month.

If you have 15-20 years left on your mortgage, you can also consider re-financing into a 15 year loan. Loan rates for a 15 year loan are typically lower, and if the rate is lower than your current rate, you’ll be able to apply that savings towards paying down debt.