For people who are staying put in their home for some time, paying a mortgage off before the end of its term has benefits. But not everyone gains from paying off the mortgage early.
San Mateo, CA (Vocus/PRWEB) March 15, 2011
In the face of stagnant home values, paying off a mortgage early might appear to be a good way to reduce debt, but the strategy is not right for everyone, said Freedom Debt Relief (FDR) vice president Kevin Gallegos.
“With consumer revolving debt balances declining nationwide and home values flat, some homeowners are considering paying off their mortgages early,” said Gallegos. “For people who are staying put in their home for some time, paying a mortgage off before the end of its term has benefits. Obviously, making extra payments eliminates the loan debt faster. This in turn dramatically lowers the total interest paid over the life of the mortgage.”
But not everyone gains from paying off the mortgage early. Gallegos suggested consumers take these factors into consideration before launching any accelerated payment process:
1. Are all other needs under control? For anyone, paying off credit card debt and contributing the maximum to a retirement plan are goals that should beat out paying off the mortgage early. Those planning to retire soon might find it appealing to eliminate the mortgage. “It’s most important, in that situation, to be sure you will have enough cash to fund your retirement,” said Gallegos. Consumers should ask: Can they afford to pay more each month? Do they have an emergency fund that could cover six months’ living expenses? If not, rest content with paying the mortgage as scheduled until these safeguards are in place.
2. Is a move coming up? Homeowners who might sell soon would do better to put extra cash in a fund for a new-home down payment. “The market is still a bit wobbly in most locales,” Gallegos said. “And lenders are demanding higher down payments than in recent years. If you plan to relocate soon, hang on to your cash for the move.”
3. Check for prepayment penalties. Most mortgage loans do not have a prepayment penalty. But those that do present heavy charges for paying the balance off early. Review the Truth in Lending disclosure to find out.
4. The earlier, the better. Making extra payments earlier in the life of the mortgage makes a bigger difference in the amount of interest the bank collects over the years.
5. Analyze the mortgage interest deduction. Homeowners who itemize deductions reap tax benefits from paying mortgage interest. Naturally, paying a smaller amount of interest results in a lower total itemized deduction amount. (To find out the potential savings, multiply the mortgage interest paid by the applicable tax bracket.) The difference could be thousands of dollars annually, so plan accordingly.
6. What else could be done with the money? Find the rate of return for a paid-off mortgage with an online mortgage tax-deduction calculator. Then compare it to potential earnings on investments. Most people would fare better by investing the money instead of paying the loan, especially when considering the interest saved over time. Those who can pay the mortgage off early might do well to do so and then invest what had been spent on monthly payments in a savings or retirement vehicle rather.
People who decide an accelerated payment schedule is right for them have several options to choose from, Gallegos said.
- Pay off any excess debt, and then add any available income to the mortgage payment. This is simple to do if the statement has a line for “additional principal.” If not, check with the lender to find their preferred method – and confirm there is no prepayment penalty.
- Some mortgage companies offer biweekly payment plans. These plans usually involve a set-up fee as well as a monthly charge. Traditionally, mortgage payments are made monthly, with 12 payments per year. A biweekly payment plan has the borrower pay half of a regular mortgage payment every two weeks – equating to 26 half-payments over a year. Without adding much to the monthly budget, a homeowner making a biweekly mortgage payment is effectively making one extra mortgage payment per year.
- DIY: Simply pay half the mortgage biweekly. Caution: Some mortgage companies will return a check that is less than the amount of the bill or received at an odd time. Others may charge a prepayment penalty. Check the lender's policies carefully.
- Divide the monthly mortgage payment by 12. Then add that amount each month to the regular monthly payment (write it on the "Additional Principal" line of the statement). Doing this every month will result in an extra month's payment each year.
“Paying off a mortgage can be a great relief. On the other hand, with mortgage debt, you're paying to own your own home, with beneficial tax deductions,” said Gallegos. “Either option can be a good one. Consider your complete financial picture before choosing the right path to home ownership.”
Freedom Debt Relief (http://www.freedomdebtrelief.com)
Freedom Debt Relief provides consumer debt resolution services. Working as an independent advocate for consumers to negotiate with creditors and lower principal balances due, the company has resolved more than $1 billion in debt for nearly 100,000 clients since 2002. The company is a charter member of The Association of Settlement Companies and a platinum member of the International Association of Professional Debt Arbitrators. FDR holds the Goldline Research Preferred Provider certification for excellence among debt settlement companies.
Freedom Debt Relief is a wholly owned subsidiary of Freedom Financial Network, LLC (FFN). Based in San Mateo, Calif., FFN also operates an office in Tempe, Ariz. The company, with more than 500 employees, was voted one of the best places to work in the San Francisco Bay area in 2008 and 2009, and in the Phoenix area in 2008, 2009 and 2010. FFN’s founders received the Northern California Ernst & Young Entrepreneur of the Year Award in 2008.
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