In Pay Off Your Mortgage – Part 1, we talked about the pros and cons of paying off your mortgage. In Pay Off Your Mortgage – Part 2, we talked about how paying off your mortgage will effect debt, taxes, your budget, your credit score, and your home equity. In this section, Pay Off Your Mortgage – Part 3, we have summarized some of the important questions to ask yourself before deciding to pay off your mortgage. Finally, for those of you ready to take the plunge, we provide three strategies for implementing your plan.
Questions to ask yourself about paying off your mortgage
- Do we have an emergency fund and enough liquid assets?
- Do we value paying down the mortgage over other uses for our money?
- Are we nearing retirement and need/want to lower our expenses?
- Do we plan to stay in the house long-term?
- Do we want to keep the tax deduction on our interest payments, or are we OK if we no longer have that deduction?
- Are there non-financial reasons we want to pay off the house (e.g., peace of mind)?
- Does my mortgage have pre-payment fees? If so, what are they? Does it make sense to pay off the house anyway?
- If this is our only loan, do we want to keep the mortgage for positive credit history purposes?
- Do we have other debt, with higher rates, that we need to pay off first?
- Are we saving enough for other goals, like college or retirement?
These questions, along with the information presented in Parts 1 and 2, may help you clarify your path forward. If you’re ready to proceed, below are some strategies for paying off your mortgage. Good luck!
Three strategies for paying off your mortgage
- Check to make sure your lender has a “no penalty clause” for prepayment (i.e., paying off the loan early). If there is no penalty for prepayment, you are free to make extra principal payments each month. You can pay off extra principal payments when you have the disposable money, but you aren’t locked into paying more in the event that you lose your job or have a financial emergency. Be sure to designate the extra money you pay as an extra principal payment so that the mortgage company deducts that amount from your principal balance and doesn’t count it as an additional mortgage payment (which consists of payments partly to principal, partly to interest, and partly to escrow).
- Refinance to a shorter-term mortgage with a lower rate (e.g., refinance to a 15-year mortgage from a 30-year mortgage), if you are confident that you can handle the additional monthly payment and if the rates are advantageous. Be sure to consider the refinancing costs and when you’ll break even. If rates are now higher than your current rate, keep the old loan, but make payments on a shorter schedule.
- Instead of one payment per month, make a ½ payment every two weeks. The result of this is that you make 13 payments each year, rather than 12. This strategy can reduce a 30-year mortgage by 3 to 6 years depending on your interest rate. Many lenders will set this payment schedule up for you for an initial charge if you want the process automated.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.