Jan
23
Paying Mortgage Early?
January 23, 2008 | 2 Comments
The traditional wisdom in the USA is that paying a mortgage early doesn’t make too much sense when you compare it to putting money into savings or investments. The Sub Prime crisis make me think again about this situation.
The first thing I have in mind is what interest rate you got from your bank. We got three different loans (one for each of the properties – primary and two rentals). One of them is 20 yr fixed at 5%, another 30 yr fixed at 6.75% and the worst one is 5.125% 5-1 ARM that has one year left – then it starts climbing. All of these loans provide some kind of tax sheltering on their own. But remember that tax deductions can only recover a percentage equal to your tax bracket. Since the best interest rates I can get on CDs out there is about 5% if I am lucky, lets compare:
If I put $1,000 on a CD at 5% and the government takes 1/3 of it in taxes I end up with $33.50 at the end of the year. If I pay down $1,000 on a 5% mortgage I save $50, but loose a deduction of $16.50 – the same $33.50.
By that calculation it seems it makes no financial difference between paying off or saving, assuming the same rate. Given the same rate, I would be inclined to save it on a CD. Why? Simple: cash is king. Having cash in my hand gives me flexibility for many other things, including emergencies. In an emergency, if I do not have cash in hand, I would have to take a Home Equity Line of Credit at a much higher interest – like 7%.
However, what happens with the other two mortgages? The one at 6.75% or the one at 5.125% that will climb next year maybe to a 7%? Those are rental properties – a bit more difficult and expensive to re-finance. There it starts to make some sense to pre-pay – but only after I have saved plenty for emergencies and other goals.
What about other kinds of mortgages? There are people out there with mortgages at higher interest rates. Mortgages at 8% that have climbed up from teaser rates. Some people have fallen victims of the sub-prime optimism of 2006. At those rates, improving your credit is your best bet. Maybe paying down all those cards could be a good start. But after you have done so – pre-paying the mortgage may not be a bad choice. It would mean increased savings and a smaller amount to refinance – maybe at a significantly better rate.
Another thing to keep in mind is age. I do not want to see myself paying a mortgage after I am 60 years old. I do not want to be forced to work. People approaching that age should consider finding ways of being financially free – like clearing all debts including mortgage. But then again, that would be my personal opinion.
The save vs. pay the mortgage is a debate that will continue forever – at least here in the US with the mortgage tax deductions. Many people have their opinions, be sure to check these out (send me a link if you want to be added to the list):
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[...] Sam wrote an interesting post today onHere’s a quick excerptThe traditional wisdom in the USA is that paying a mortgage early doesn’t make too much sense when you compare it to putting money into savings or investments. The Sub Prime crisis make me think again about this situation. … [...]
“…pre-paying the mortgage may not be a bad choice.”
Absolutely. A home is not an asset until it has been paid off “free and clear” — and the best, fastest way to do that is via home equity acceleration:
More and more folks are using a Home Equity Line of Credit (HELOC) or a business-line-of-credit (BLOC) or personal-line-of-credit (PLOC) as an interest cancellation account to accelerate their home equity and payoff their home *years* sooner than listed on their mortgage amortization schedule.
Unfortunately, today’s Real Estate market means that folks can no longer count on appreciation to build home equity. Those who realize that they need to pay down their current mortgage debt are looking for alternate ways to aggressively (yet safely) build equity.
And they’ve discovered a perfect online system to do that; they can focus on their wealth accumulation goals while accelerating their equity simply by using a Home Equity Line of Credit to ‘power’ the Money Merge Account™ financial solutions program.
A typical 30 year loan (of whatever type) can be paid down in 1/3 to 1/2 the time — it’s a great way to save *huge* amounts of income by eliminating a mortgage amortization front-end interest load. (On a million-plus dollar home, I’ve personally seen where the Money Merge Account™ program will save the homeowner $750,000 in interest charges!)
And the best thing – homeowners don’t have to refinance their existing mortgage or, in most cases, make any adjustments to their lifestyle.
It is unfortunate that most of us were never taught to follow three essential principles: (1) Avoid paying interest, whenever possible, (2) Use other people’s money, whenever possible and (3) Find and use a financial system that will guide you, especially if you have the tendency to go off-track. The Money Merge Account™ software and the program’s counselors use these principles to keep each homeowner focused on their wealth accumulation goals.
I’d be happy to provide further details…