June 5, 2015
Most people long for a time when they are debt free. It sometimes seems unimaginable to pay off a mortgage in less than 20 or 30 years—but it may be easier than you think. By simply making bi-weekly payments instead of monthly, or by adding more to your mortgage payment each month, you can shave years off your loan.
This may be an easy way to pay off your home early, but it doesn’t mean that it’s a good idea. Before you start accelerating your mortgage repayment, ask yourself the following questions.
• How expensive is your mortgage compared to other debt? If your annual interest charges for your mortgage are lower than the interest you pay on other debts, it might be a better idea to pay off those other debts first. You can then roll all the savings into your mortgage payment and pay it off even faster.
• Are you getting any tax deductions for the interest? Mortgage interest is often deductible, which means it’s reducing your overall tax burden. If you take these deductions, then find out how paying off the mortgage would impact your taxes.
• Do you plan to sell the house in the next five years? If you’re planning on selling your home soon, you could instead put the money you would have used on the extra mortgage payments toward the down payment for the new home.
• Could you earn more on the money than you are paying in interest on an after-tax basis? For example, if you are paying 4% interest on your mortgage and are in the 25% tax bracket, your after-tax interest equivalent is 3% (25% less than 4%). Many investment vehicles can offer a yield greater 3% so it is possible that your money could be put to better use by investing it rather than paying off your mortgage sooner.
• Do you have any emergency savings? If you don’t have 6 months worth of expenses saved, then paying off your mortgage early is not a priority. When you’re just one or two paychecks away from being unable to pay your bills, you face the very real possibility of losing your home in a crisis. Instead, focus on building that emergency savings first.
• Are you maxing out your retirement savings? When an employer matches a portion of your 401(k) contributions, it’s like getting free money that grows and compounds on a tax-deferred basis. This could very easily add up to more money than what you spend on mortgage interest.
At Kramer Wealth Managers, we understand that paying off your mortgage early can be a good step—but we also know that it isn’t right for everyone. Contact us today so we can develop a plan that helps you get on your ideal WealthPath.