Prepaying Your Mortgage

Dated: 06/29/2020

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Paying off your mortgage can provide peace of mind and is a worthy goal but is it the best thing for you to do at this time.

Do you have higher interest rate debt currently?  If you have credit card debt with double-digit rates or personal, car or student loans, you'll probably save more money from interest by paying these things off before you pay off your mortgage which is usually one of the lower rates on debt.

Many financial advisors recommend funding your annual retirement contribution before paying down a mortgage.  If your company offers matching funds for your contribution, you would be leaving money on the table by not making the contribution to your retirement.  For instance, you would be getting a $10,000 value by putting $5,000 into your retirement if your company matches it.

Creating an emergency fund is another favorite of financial advisors.  When the rainy day arrives and you need funds, it may be difficult to get money from the equity of your home, especially if you have lost your job.  Six months' worth of living expenses is a good target to have available should you need it and a year's worth would be even better.

Children's college funds may be another priority that takes precedent overpaying off the mortgage.  Whether you're saving or investing to pay for their education, it is going to cost more than it did when you were in school.

When you are ready to start paying off your mortgage, decide on the best way to do it.  Regular principal contributions on a monthly basis are very predictable and will get the job done.  Setting up an automatic bill pay with your bank will assure that you don't re-prioritize that extra amount every month because there is always going to be something else to do with extra money.

It is important to be sure that the lender applies the additional payment amounts to the principal and not to the escrow account.

Use the Refinance Analysis to see what extra amount you'd have to pay to retire your mortgage in a certain time frame or by making a specific additional amount each payment, you can find out when the loan will be paid.  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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Stan Zarycki

Stan Zarycki has been in Real Estate and Mortgage Lending since the mid 1970’s. Stan left the industry to pursue other interests in 2008. We are thrilled to have Stan back in the Real Estate profe....

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