Our parents’ and grandparents’ goal in life was to prepay their mortgage on their homes. It can provide peace of mind and can be a worthy goal. But is it the best thing for you to do right now?
Here are some things to think about before you decide to pay off your mortgage. Do you currently have any higher interest rate debt? If you have any double-digit debt like credit cards or personal loans, car, or student loans it will save you more money in interest to pay these off first. A mortgage usually has a lower interest rate.
Financial advisors would recommend you fund your retirement contribution before you pay off your mortgage. If you work for a company that offers matching funds, you would be leaving money on the table by not taking advantage of that additional contribution to your retirement fund. As an example, with a company match, you would be getting a $10,000 value by putting $5,000 into your retirement fund.
Another favorite of financial advisors is to create an emergency fund. You should put aside six months’ worth of living expenses as a minimum target, a years’ worth would be even better. This fund will help you through a job loss or pay for a repair job or other “emergency” that you did not plan for.
Funding your child’s college fund often takes precedent over paying off a mortgage. Tuition costs a lot more these days than it did when you went to college. You can put money aside for them by saving it or investing it into a 529 account or certificate of deposit.
Decide what is the best way to pay off your mortgage when you are ready. By making regular monthly principal contributions, you will get the job done and it will be predictable. Set the payment up as an automatic bill pay with your bank so you don’t look at that extra money and re-prioritize it for something else. There will always be a reason to use the extra money.
Make sure your lender applies the extra payment amount to the principal on your loan and does not throw it in the escrow account. Some bill pay portals allow you to do this yourself by checking a button and setting an amount.
Use my Equity Accelerator to see the result of making an extra contribution would have to pay off your mortgage in a certain time frame or by adding additional monies each payment. Regardless of which way you go, prepaying a loan will save interest, build equity, and shorten the term on a fixed-rate mortgage.
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