Armchair Millionaire Community Bulletin: Escaping the Mortgage Interest Trap

Even with today's near-record low interest rates, the total amount of interest we pay over the life of a mortgage can seem like a staggering amount. Paying down your mortgage early might be the right answer.

(PRWEB) April 17, 2004 --Even with today's near-record low interest rates, the total amount of interest we pay over the life of a mortgage can seem like a staggering amount. It's certainly one of the reasons that many people make it one of their goals to pay down their mortgages early.

When we asked members of the Armchair Millionaire community about it, we found that lots of people are either in the process of knocking off their mortgages early, or already have. Here are just two comments we heard:

"After refinancing, opening a Roth IRA account, maxing out our 401(k), and increasing our emergency fund, I have had the opportunity through our credit union to send in $100 extra every week towards our mortgage principal. Our goal is to finish the mortgage payments in 5-7 years. My attitude is that there is no greater feeling in the world than to have your home paid-off and be debt- free, long before retirement!" --Richie C.

"We decided 20 years ago that we were not going to move again so we doubled up on our mortgage payments and got it paid off about 5 years ago. It's the most liberating feeling we've ever had. My husband and I have both had layoffs and job changes and not having a mortgage payment has helped us keep our savings intact. We feel like we are in a very good place now." --Mary

While getting out from under your mortgage always sounds good, you should still carefully evaluate whether it's actually the best option for you. Here are the key questions to ask:

•   Do you receive a tax deduction for your mortgage interest? While it definitely saves you money, less than half of homeowners actually qualify to claim it.
•   Can you get a better return somewhere else? If you have the choice of paying off your mortgage early or investing that money, which will get you a better return on your money? You'll need to take into consideration where you might invest that money and if it will be in a tax-advantaged account.
•   Do you have a better use for the money? Obviously, if you have high-interest credit card debt, you'd be better off paying that down before you make extra payments on your mortgage. But you need to consider your real long-term goals, too, like funding your retirement.

If you decide that paying down your mortgage early is the right move for you, my guide will show you how to do it.

The Armchair Millionaire's Guide to Burning Your Mortgage Early

Make bi-weekly payments. Make your one-half of your regular mortgage payment every other week. You'll end up making 26 payments a year, or the equivalent of 13 monthly payments. Contact your mortgage company to arrange to make the more-frequent payments. (Not all lenders will allow you to do this, but many will.)

Pay extra every month. Add on an amount to your regular payment every month. Most mortgage companies will let you automate your payments (including the extra amount) so that it is withdrawn automatically from your bank account for you.

Shoot in extra whenever you can. Get a holiday bonus? A tax refund? Send that extra money off to your mortgage company to knock down some additional principal.

What not to do: Do you receive offers to enroll in bi-weekly payment programs? Steer clear of them. You'll be charged several hundred dollars just to sign up, plus monthly fees. If you can make the bi-weekly payments on your own working directly with your mortgage company, go that route. If not, choose another extra-payment option.

THE BOTTOM LINE: If you have the luxury of making extra payments on your mortgage, you should definitely consider it--but weigh this option carefully against the benefits you might receive by using that money elsewhere.

This column appears each week on CNNMoney.com, the Web sites for CNN and Money Magazine. Syndicate this weekly column in your publication or Web site: http://www.armchairmillionaire.com/weeklycolumn

ArmchairMillionaire.com was founded in 1997. The company's first book, The Armchair Millionaire, was published in 2001. Today, www.ArmchairMillionaire.com is an established community of common sense savers and investors.