Does it ever make sense for a homeowner to pay off a mortgage early?
According to Kiplinger.com, the answer depends on the interest rate of the loan and the timing of the payoff.
Paying down a 6% mortgage is the equivalent of earning a 6% taxable return on your money. You should be able to beat that return by investing your money elsewhere, especially when investing for the long term.
“If you have a very low interest rate on your loan and know that you can earn a higher return with additional money you have to invest, it’s OK to keep the mortgage,” says Los Angeles CPA Michael Eisenberg.
Investing outside your mortgage also gives you easier access to your funds because you don’t have to borrow against your home equity to get your money. Paying more toward your mortgage can reduce the total interest paid, and you might pay off your loan earlier. But it doesn’t lower your payments, and if you’re still in the early years of the loan, you might not see the difference for a decade or more.
Your priorities may be different, however, if you’re nearing retirement and your mortgage is close to being paid off. In that case, making extra payments can speed up the payoff, lowering your expenses after you leave your job. In Eisenberg’s experience, “most people don’t want to have debt when they retire.”
Paying off the mortgage early made sense for Myrna Oliver, 64, who worked at the Los Angeles Times for more than 30 years. When Oliver was in her mid-50s, many of her colleagues were getting buyout offers. She wasn’t ready to retire yet, but she wanted to be able to jump at a good offer if one came her way. To do that, she needed to cut her post-retirement expenses — especially the mortgage on her condo in downtown Los Angeles.
“I didn’t want the mortgage payments to figure into my retirement spending,” says Oliver.
So Oliver began making extra payments toward her 7.5% loan whenever she got a raise, a bonus or extra money from some other source. At age 60, she paid off the loan — eight years early — and shifted the money to her 401(k) plan to take advantage of catch-up provisions for contributors who are 50 or older. This year, employees in that age range can kick in an extra $5,000, on top of the $15,500 that all workers may contribute.
When Oliver got a buyout offer last year, she had only three weeks to make a decision, but it was a no-brainer.
“Having the mortgage paid off gave me the freedom to take early retirement,” she says — and to take a year off to travel. Full Story
When obtaining a loan make sure to ask if there is a penalty to pay off early and then plan to. Any unforseen exception could happen so best not to do 15 loan. But with a 30 and paying 1 extra payment towards principal and paying off sooner will give more equity and work towards paying it off.
Freedom is a good thing!
hi,
Your mortgage will probably be my biggest financial commitment and with something as important as that, I agree that expert advice is essential.After all it’s the only way to make sure I can made exactly the right decision .