You can save tens of thousands of dollars by prepaying your mortgage. But is it a smart move? A CNNMoney reader asks expert Walter Updegrave:
The psychological freedom of not having a mortgage is very appealing to us, but the argument for trying to invest the extra cash at a higher rate is compelling too. What’s your take on paying off the mortgage early?
Surprisingly, this is one financial point on which the experts do not agree. Updegrave says:
My advice is to first make sure you’re maxing out your retirement savings plans and make sure you’re on track toward a comfortable retirement. Once you’ve got that front covered, you can start paying off that mortgage more quickly to reap those psychological benefits you find so appealing.
Your Money or Your Life encourages readers to pay off mortgages early. Ordinary Wealth, Extraordinary People says not to pay them off early. Dave Ramsey, in The Total Money Makeover, advises that people put 15% of their income toward retirement savings before tackling their mortgages. (Though he does encourage people to pay off their mortgages early, when possible.)
In The Laws of Money, Suze Orman says just the opposite. She doesn’t care about tax write-offs. She doesn’t care about potential gains in the stock market. Paying off your mortgage offers a guaranteed return on investment: “You cannot live in a tax return. You cannot live in a stock certificate. You live in your home.” Orman says to invest in the known before the unknown.
The authors of All Your Worth suggest a combined approach: 10% of your income to retirement, 5% to paying down your mortgage, and 5% to save for future dreams. “Paying off your home also does something many financial planners neglect to mention: It gives you freedom. Once that mortgage is gone, just imagine all the freedom in your wallet.”
In Wealth Without Risk, Charles Givens offers a novel approach to prepaying a mortgage. “On the first of the month when you write your regular mortgage check, [include extra] for the ‘principal only’ portion of the next month’s payment.” Using my own $1625.65 mortgage payment as an example, $239.55 is designated for the principal. If I were to make a payment of $1865.20, I would be making approximately an extra monthly payment! If I do this every month, I’m cutting the term of my loan in half.
If you do decide to accelerate your mortgage payments, try to do it on your own, whether you pay one full extra payment during the year, or pay 8% extra every month. Banks often charge an fee to add this as a formal service, but you can do it for free yourself!
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