Should You Pay Off Your Mortgage Early?

Bills, bills, bills! And the biggest budget buzz saw usually involves keeping the roof over your head––the mortgage. Ever fantasize about what it would be like to not have a monthly mortgage payment? It could be like winning the lottery, having all that extra money at the end of the month to use for other purposes.

Some people take the fantasy a step further and devise a plan to pay down their mortgages early. While it sounds like a good idea, is it something you should really consider? As usual, there are a number of things to think about. Here are a few:

• Will you need cash quickly? Of course, you never know this for sure, but it’s safe to assume that at some point, you’ll need access to cash fairly quickly for an emergency of some kind. If your money is tied up in your home, it won’t be easy to get to it quickly. Before thinking about using any extra money to pay down the mortgage, you should have at least three to six month’s worth of living expenses in a more liquid account, such as a savings account or CD.
   
• Other debt. Do you have any credit cards with high balances? Chances are the interest on your mortgage loan is much lower than that on your credit card debt. It just makes sense to pay off any debt that’s costing you more to finance. So, use any extra funds to pay off that credit card before you think about paying down your mortgage.
   
• Retirement savings. The advantage of compound interest is, well, compounded by allowing your investment to accumulate over a longer term. Saving extra cash in a tax-deferred retirement account (Traditional IRA, employer 401k) could help build that investment over time. Researchers at the University of Texas at Austin used Federal Reserve data to show that those who invested in 401k* plans earned 11-17 cents more on the dollar than those who chose to prepay their mortgage. How? Pretax dollars. You pay off a mortgage with after-tax dollars while many times you fund a retirement with pre-tax dollars.
   
• Tax savings. It’s almost a standard response, “I like the tax deduction I get from my mortgage’s interest costs.” While a savings might be seen, a tax benefit applies only to those taxpayers who itemize beyond the standard deduction. And remember, the greatest savings come early in the loan when much of the payment goes to interest costs. Later in the loan, more money goes toward principal, reducing the tax deduction.
   
• Emotions. Ridding yourself of a mortgage can give you a sense of security and relieve the emotional anxiety associated with owing money by reducing your need for cash flow.

As you can see, there are quite a few things to consider when deciding whether or not to pay off your mortgage early. If you do choose to go ahead and pay off the mortgage, here are some suggestions:

1. First, check your loan contract to make sure there are no prepayment penalties.
    
2. Choose your prepayment methods. There are a few to consider:

   •  Monthly payments—round up your monthly payment (to the next $50 or higher). Tack the extra amount onto each payment, noting that you want that amount applied to principal. As an example, with a $100,000 30-year loan at 8%, prepaying just $10 per month can carve 19 months off your term and save you over $10,000 in interest (according to Keith Gumbinger, VP HSH Associates, a mortgage industry publisher).

   •  Occasional payments—try making two “bonus” payments each year. Depending on the amount, this could trim years off a 30-year mortgage.

   •  Biweekly payments—prefer a more automatic prepayment plan? Check with your lender to see if you can switch your monthly mortgage to biweekly. Consider that since there are 26 biweekly periods per year, you’ll actually pay the equivalent of 13 monthly payments, which will allow you to pay off the loan more quickly.

As usual, with any financial decision, you want to give thought to all possibilities. Vantage has qualified professionals in both investments and mortgages who are prepared to help you come to the decision that’s right for you.

For mortgage help, contact Mortgage Solutions, LLC**, at 314.264.5325, or click here for more information.

For help on non-deposit investment products and services, contact the Vantage Investment Services Group at 314.264.5365, or click here for more information.

<sub>*Investments in 401k plans are designed for long-term duration and premature withdrawals from these plans are subject to immediate tax consequences.

**Mortgage Solutions, LLC, is a wholly-owned subsidiary of Vantage Credit Union. Vantage Credit Union and Mortgage Solutions, LLC, are not registered boker/dealers and are not affiliated with LPL Financial.</sub>