April 10th, 2017 5:07 AM by Jackie A. Graves, President
years, the conventional wisdom was "pay off your mortgage as fast as you
can!" For an entire generation, this mantra resulted in "note-burning
But prepaying your mortgage, while it can save you money on total
interest, may not make sense for you in the long term. Homes aren't really
investments, so handing over extra money to a bank may not make any sense.
Don't get me wrong. If you can pay your mortgage off by a date
certain, possibly when you retire, it isn't necessarily a bad idea. If it gives
you peace of mind -- and you can afford to do it -- go in that direction.
prepaying our mortgage off for years, then other things came into view: We had
two daughters we wanted to send to college. We needed to stockpile cash to
cover out-of-pocket medical expenses, which really paid off when we had a
catastrophic health event.
Look at mortgage payments not as an investment in financial
security or an investment in real estate. Look at them in terms of cash flow.
Here's what you need to know:
-- Do you have enough emergency savings? If you have enough cash to cover from three-
to six months of being out of work, out-of-pocket deductibles for all of your
insurance policies and a cushion for big expenses like roof, heating and major
appliance replacement, then it makes sense to consider mortgage prepayment.
Of course, most Americans don't have enough emergency savings and
often get blindsided by emergency expenses. During our health emergency, we
used up all of our emergency cash to cover a wide range of medical expenses.
We're glad we had the cash. If it was in our mortgage, we would've had to take
out a home-equity loan -- go into debt -- to access it.
-- Is Your Retirement Plan On Track? If you aren't fully funding your retirement
vehicles like 401(k)s, then don't do pre-payments. Unless you have sufficient
home equity and plan to obtain a reverse mortgage in retirement (offered starting at age
62), having the cash in a retirement plan is a better option.
-- Do you see your home as an investment? For the most part, particularly after 2008,
homes are not good investments, so adding to your principal to increase your
equity may provide little, if any, return.
Your home-equity growth
should be able to beat inflation. In some areas, that's happening because of
strong job growth and robust local economies. Check on Zillow or any other home-valuation site to
see how much your home is worth and whether homes in your neighborhood are
Finally, pre-payment makes
no sense at all if you plan to move. Why hand money over to a bank when you may
need it soon? Here are some other guidelines, courtesy of the excellent
financial blog InvestorJunkie.com.
These are some assumptions for those in the best position to
prepay or refinance into a 15-year mortgage:
-- You plan to stay in the home for at least 10 years.
-- You and your spouse are younger than 50 years old.
-- The monthly costs to own your home are less than 30% of your
-- You have 25% or more equity/downpayment for your home.
-- Any difference in savings from prepaying or having a shorter,
15-year mortgage will go into investments.
-- The home you purchase is an average–sized, 2,000-square-foot
home and not some McMansion.
-- You are a disciplined saver and don’t carry any consumer debt.
Oh, and one more thing if you're still stuck on paying off your
mortgage. Even when you're debt-free, you will still have to pay property taxes
and maintain the property. The taxes won't ever go away, although you'll get a
slight break when you hit 65.
Wasik - To view the original article click here