September 15th, 2014 9:58 AM by Jackie A. Graves, President
For most of
your life, preparing for retirement means investing. But as the actual date
approaches, you also will need to streamline your budget so your expenses will
be as low as possible. If a mortgage payment is your biggest monthly expense,
as it is for most people, you might want to try to pay off your mortgage before
analysis by the Consumer Financial Protection Bureau (CFPB) showed the share of
Americans age 65 and older with mortgage debt rose to 30% in 2011, from 22% in
for those borrowers also rose, with the median amount rising to $79,000 from
$43,400 during those years after adjusting for inflation.
everyone can manage it, many older homeowners prefer to pay off their mortgage
balance entirely before they retire.
Keep in mind
that some expenses of homeownership won’t disappear: you still need to pay for
homeowners insurance and property taxes—and if
you live in a condo or a home within a homeowners association,
you’ll need to keep paying your association dues.
eliminating the bulk of your payment, the mortgage principal and interest,
can go a long way to smoother cash flow once you stop work.
Ways to Pay Off Your Mortgage
The best way to
pay down your home loan depends on your loan terms, balance and budget. In
particular, you need to consider your monthly budget and whether you can afford
to make larger payments to reduce your mortgage balance.
particularly important to think about how long you plan to keep your home and
how far you are into your mortgage.
If you’ve been
paying off a 30-year fixed-rate loan for 15 or 20 years, you should think
carefully about the advantages and disadvantages of refinancing.
In some cases,
it’s a smart move to refinance into a shorter term loan of 10 years or even
less, but be aware of the transaction fees and closing costs associated with a
refinance—typically 2% to 3% of the loan amount. You may be better off applying
those closing costs to extra payments on your current loan, especially if
you’re near the payoff date.
Early in any
home loan repayment you’re mostly paying interest, but by the last few years of
your loan, you’re paying mostly principal. If you have refinanced before or
bought your home within the last few years, refinancing into a shorter loan
term could cause a big jump in your payments.
If you do opt
to refinance into a shorter loan, be sure you can comfortably afford the higher
payments and that you’ll recoup your costs quickly.
Prepay your loan
locks you into a new payment plan, but if you’d rather have some flexibility,
you can make extra payments to eliminate your mortgage faster.
You may want to
add money to every payment, make an extra payment each year or even make a lump
sum payment if you receive a tax refund or bonus.
Not only will
you pay off your loan faster, but you’ll save thousands in interest payments.
For example, if
you took out a $200,000 loan in 1999 at 4.5%, your principal and interest
payments are about $836 per month—and your loan payoff date is 2029.
If you add $250
per month to your payment, you can eliminate your loan in 2025 and save about
$13,630 in interest. If you can manage $500 more per month, you can save
$21,300 in interest and be mortgage-free in 2023.
Put Mortgage Payoff Decisions in Context
to consider any decision about your home loan in the context of your other
financial goals and commitments. Be sure you are contributing as much as you
should to your retirement funds and eliminate non tax-deductible debt before
you begin to pay down your mortgage.
lender and a financial planner to discuss your options on an individual basis.
Lerner | This story was originally posted on SeniorHousingNet.
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