By Bruce Cathcart
Is paying off your home mortgage a good idea? I think so. But if you want to start a small riot enter a room full of investment advisors and tell them that you think the best investment is to pay off your mortgage and watch the argument break out! Gold bugs will insist that you invest in precious metals to protect against the coming crash of the almighty dollar, the Wall Street boys will argue that the stock market is the only way to go (although none will agree on the same investment strategy), and the most conservative advisors will recommend investing in bonds and annuities. Even your own accountant may advise against paying off your mortgage stating that you need the interest deduction when it comes time to pay your taxes. I disagree! While this may be good advice for those folks with a lot of extra money to invest it doesn’t make sense for the majority of us whose main investment in our lifetime will be our home and each month we struggle just to make ends meet. You know us, the new “middle class”. If we want any chance of retiring someday with any degree of security, then I believe that it should be your primary goal to eventually own your home “free and clear” (with no mortgage). To accomplish that goal you will need a plan. Here are a few ideas to consider that can help you to pay off your mortgage in time for your retirement.
First of all your plan must be realistic. Counting on rich uncle Harry dying and leaving you enough money to pay off your mortgage in most cases is highly unlikely (especially if you do not have a rich uncle Harry). As is winning the lottery or hitting the jackpot at a local casino. The odds be never in your favor. Assuming you currently own your home with a 30 year mortgage on it there are several realistic (and practical) things that you can do to make sure your home is paid off in time for your retirement. If you are in your early thirties or less you can simply make your monthly payments for the next 30 years. While this sounds simple, it requires dedication, discipline, and restraint on your part. Your home is not an ATM! Many people learned this difficult lesson over the last few years by borrowing money against their homes and taking out additional loans as their equity grew. The temptation to have an extra $100,000.00 or more was just too great for these folks and, as a result, many lost their homes to foreclosure or ended up “upside down” on their mortgages and buried under a mountain of new debt. To pay your home off over 30 years can be challenging, but it can be done.
If you do not have 30 years or do not want to wait 30 years to pay off your mortgage there are other options available to you. You can start by making additional principle payments on your loan. This is an especially good idea in the first few years that you have your loan as you can reduce the term of your loan by several years just by making one extra monthly payment each year for the first 5 years. Want to go faster? You can refinance your mortgage with a 15 year or even a 10 year loan. Your payment will go up, but your interest rate will go down so, not only will you pay your loan off quicker; you will save thousands of dollars in interest payments. Many people have taken advantage of the current, historically low interest rates to do just this.
As your family grows and your income grows you may wish to sell your first home and buy a larger home with a higher mortgage. This is a good idea as long as you stay either dedicated to paying this new mortgage off or plan to eventually sell this home and take your equity and purchase your “retirement home” with the cash from the sale. This can be a smaller home in the same area (called down sizing) or it can even be a home in a completely different area where home prices are much less. Either way the goal is to not have a mortgage on the new home.
Whether you stay in the same home for 30 years or trade up, or trade up and then down again, the key is to stay true to the goal of paying off your mortgage. Create a plan, think ahead and end up with your home paid for to insure a secure retirement.
Real Estate Tip of the week: If you are thinking that you would like to retire in the next 10 years now is a very good time to consider refinancing with a 10 year loan. If possible, look at any assets that you can liquidate (like a life insurance policy, rental investment, etc.) that you can use to make a principle reduction on your loan at the same time as you refinance your home. This will lower your monthly payments and help you to meet your 10 year goal of retiring without a mortgage on your home.
Bruce Cathcart is the Broker/Co-Owner of La Quinta Palms Realty, “Your Friendly Professionals” and can be reached by email at firstname.lastname@example.org or visit his website at www.laquintapalmsrealty.com.