1/12/2012 1:26 PM ET|
Pay off your mortgage in 2012?
Retiring your house note early can be smart. Here are 6 strategies designed to help you get to the finish line ahead of schedule.
Paying off your mortgage might sound like an ambitious New Year's resolution, especially if you have recently refinanced into a 30-year term. But it's still smart for homeowners to give some thought as to how they'll pay off their home loan -- if not in 2012, then sometime soon.
An early mortgage payoff can net substantial interest savings compared to making scheduled payments for 15 or 30 years.
Paying more quickly reduces your housing cost, freeing up that money for other needs and wants, says Ronit Rogoszinski, a wealth adviser at Arch Financial Group in Garden City, N.Y. You'll still be responsible for property taxes, homeowners insurance, home maintenance and repairs, but your mortgage payment will disappear.
"Once that money can remain in your pocket, you control that money," Rogoszinski says. "It's yours. It's not going to someone else."
An argument can be made in favor of allocating more cash to investments instead of eliminating low-cost debt, says Alfred McIntosh, principal of McIntosh Capital Advisors, a financial planning and investment management firm in Los Angeles. But he says being mortgage-free can be "a very beautiful thing," especially for homeowners near retirement age.
Here are six ways to get rid of your mortgage sooner.
1. Pay more each month
The simplest way to pay off a mortgage is to add an extra amount, say $50 or $500, to each monthly payment, Rogoszinski says. You shouldn't sacrifice necessities, such as sustenance or medical care, but putting a little more toward the mortgage can be a good financial habit.
"If you can manage your expenses in a way that an extra couple of dollars goes toward the mortgage, that's freeing up money down the road sooner rather than later," she says.
Some homeowners add enough to their payment each month to make one extra payment each year. McIntosh explains the math: Divide one payment by 12 or multiply one payment by 10%, and add that to the amount each month.
Make sure the extra money is applied to principal, not interest or your escrow account. Prepaying interest or padding your escrow won't accelerate your loan payoff date.
2. Make extra payments
Making an extra payment in January, December or some other month is more challenging than paying a little extra each month, but the benefits are the same, Rogoszinski says.
"The faster you get rid of your debt, the more cash flow you have, the more things you can do," she says. "I don't think there is ever a wrong time to do that."
One way to make that extra payment less painful is to make payments every two weeks instead of every month. The result is 26 half-payments instead of 12 full payments. McIntosh says biweekly payments can knock approximately six years off a 30-year term, as long as the extra amounts are applied to principal.
3. Pay a lump sum
A gift of money, an inheritance, a bonus or an income tax refund creates another chance to put extra money toward your mortgage. This strategy works best if you don't have other, more costly debt, Rogoszinski explains. "You really want to pay off the most expensive debt you have as fast as possible," she says.
Examples of higher-cost debt include most private student loans, auto loans, department store cards and revolving credit cards.
Another option is to deposit your windfall into a savings account and set up an automatic monthly payment from that account to your mortgage, Rogoszinski suggests. That way, you can have money in the bank and put money toward paying off your mortgage, too.
A more aggressive approach is to invest the lump sum for a return that's higher than your mortgage rate, then use the principal, plus appreciation, dividends and interest to pay off the mortgage when you retire, McIntosh suggests.
Either way, the key is figuring out how to eliminate your mortgage, because that makes the difference between who might end up with a comfortable retirement and who will not, he says.
4. Refinance to speed up payoff
Refinancing can help you pay off your mortgage sooner, the idea being that a lower payment frees up money that can be applied to additional principal payments.
The challenge is being able to qualify for a new loan, says Justin Lopatin, vice president of residential banking at Baytree National Bank & Trust in Chicago.
The biggest hurdle, Lopatin says, is the effect of declining home values. A lower valuation can throw off your loan-to-value ratio, result in an appraisal that's too low to support your loan amount or trigger a need for mortgage insurance, making your new payment more costly and refinancing less attractive.
You'll also need a good credit score and two years' worth of documented stable income, Lopatin says.
To maximize the benefit of refinancing, shorten the term of your loan. For example, if you've paid off 10 years of a 30-year term, refinance with a 15-year mortgage instead of a new 30-year loan.
5. Shrink your housing costs
Selling your house might seem like a dramatic way to get rid of your mortgage, but it's certainly effective, leaving you free to buy a more affordable home for cash or become a renter without any housing debt.
Whether downsizing makes sense is largely a matter of your needs and personal lifestyle, yet Rogoszinski suggests it's "definitely something to consider." However, don't try to time the housing market by selling high and buying low. That's a strategy more appropriate for professional real-estate investors than for homeowners.
6. Tap retirement savings
Homeowners who don't have spare cash on hand might be tempted to tap a retirement account to pay off a mortgage. This idea has gained purchase in recent months, as legislation pending in Congress would waive the early withdrawal penalty if money removed from a retirement account were used to pay a home loan.
Still, Rogoszinski and McIntosh advise caution.
"My instinct is not to look at that very favorably, particularly because of how little retirement savings Americans have already," McIntosh says.
One exception: If you're in danger of foreclosure due to a temporary financial setback, a retirement account might be a resource of last resort.
Even then, McIntosh adds, "be very, very careful."
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I just paid my house off at the age of 43. I completely disagree with people who talk about 'nearly free money' with the tax deductions. I don't think they fully understand the details.
1. If you borrow $200K at 4% for 30 years, you will pay $143K in interest. That's $143,000 in interest payments alone. That's not 'free money' in my world.
2. I think some people don't realize that an income tax deduction doesn't mean that the govt is paying your mortgage interest. It only means that you can pay the interest with your own pre-tax money. And, this is very limited, see #3.
2. People who tout the income tax deductions always give half the story. When you file your taxes, you get to choose using either the 'standard' deduction or the 'itemized' deduction, and you use whichever is greater. The standard deduction for individuals is about $6K, and about $12K for married couples (which are fairly generous). This means that your mortgage interest deduction only matters if it exceeds these amounts. When you borrow $200K as above, your mortgage interest is $8K the first year. So, if you're married, this doesn't help you at all around tax time, because your standard deduction exceeds your itemized (mortgage interest) deductions.
Also, for those talking about tax deductions; you need a basic math lesson.
I paid 10k in interest last year and got back 2k of that in my tax refund. So I net lost 8K. You only get back roughly 20 percent of the interest you pay in.
NO ONE forced anyone to borrow money. It would seem you wanted to live above your means and now want someone else to pay for it. How about let's level the playing field for real. Get the government completely out of the housing market, AND the stock/bond market, AND business in general and then see what happens. It will be ROUGH for a little while. Then when the dust has settled we, the working business owners, can pick up the pieces without an idiot bureaucrat trying to destroy us.
You amuse me, dezazul. You had no intention of sharing your 'paper' gain when home values went up. But you want the retired schoolteachers, etc., that own bank stocks in their retirement funds to suffer because YOU made a mistake and bought into a bubble. Selfish little loser, aren't you. The hell with the poor retired people trying to scrape by on a little retirement fund they contributed to for decades. Yeah, screw them! You just pretend it isn't them you are hurting when you don't pay back the money you borrowed from THEM. Go 'occupy' something with the other thieves that pretend it isn't working people that you are hurting. Tell yourself that lie long enough and you might start to believe it.
With bond yields in the toilet and stock market risk in uncharted waters, paying down your mortgage principle is a great way to save and invest. With a little luck, you may even be able to pay it off before your property taxes rise to the level of your mortgage payments.
Although I agree with this article - paying off our house is a great idea - did they really need 2 pages to say "pay more"? Besides the refinance bit and the selling your home to downsize (really? Anyone try to sell a home lately when you are probably underwater?) the other tips are basically pay more - either all at once or little by little. The comments posted are more informative and interesting.
Another common sense article by MSN money.
"Once that money can remain in your pocket, you control that money," Rogoszinski says. "It's yours. It's not going to someone else."The article was a good reminder of the basics of accelerated mortgage payoffs, but this statement was too blatantly, idiotically obvious for words.
Not a regular:
I agree with you whole heartedly. Where we live here in the midwest property is not taken the nose dives of elsewhere. But, we certainly do agree with the debt free lifestyle.
You want the government out of the stock / bond market?? Really? The governmnet is the stock/ bond market. Most bonds are municipal bonds which lend money for government building projects, without government there wouldnt be a bond market. Wake up man!!! Public companies like Halliburton, and Boeing create their fortunes through governmnet contracts and wasteful spending through the defense department. Guys like you make me laugh you are so naive..
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