Think before you pay off the mortgage ahead of time

It is everyone’s dream to pay off the mortgage and live rent free for the rest of your life.

When mortgage rates where 6% and 9%, there was a clear advantage.  You could save hundreds of thousands of dollars by paying it off in advance.  With mortgage rates at 4.5%, and lower in some cases, it may still be a good idea.  But, there are other things you should do first.

Pay off all short, unsecured loans first.  This means payoff the balances on those nasty credit cards before you put an extra dollar on the principal of you mortgage.  With credit card rates 13% and in some cases as high as 23%, the 4-5% on your mortgage is almost free money.  You gain so much more with no credit card debt than without any mortgage debt.

Think about emergencies.  For most people, it would take most of their savings to pay off a sizeable mortgage.  This would leave little for any emergencies or crisis that arises.  There are of course all the medical issues that you may face, but there is also the loss of a job or a bad turn in the stock market.  A cushion of about 6 month’s living expenses is what many financial advisors suggest.

Retirement.  While it may be a while off, you should make the maximum allowable amounts in all retirement accounts.  You will live longer than many generations before you.  You will want to insure that there is enough for a pleasantly long life.

School for the kids.  For young families you may want to invest early in savings for them.  That includes 529 plans, other college savings account and Michigan’s savings plan.

You should plan on paying off the mortgage by the time you retire.  There will be a comfort that comes with no rent due while you are on a fixed income.  Also, you may need the mortgage interest discount in the years leading up to retirement. 

If you are late in a 30 year mortgage, take a look at what you actually pay in interest payments compared to the amount that you would need to pay off the principal.  There is more mortgage interest pain in the early years than later in the life of the loan.  If you pay off you mortgage late in the life, you may not be saving that much. 

How fast should you pay it off?  First, ask yourself when you will want to retire.  Then, calculate how much more per month you need to pay to be mortgage free by retirement age.    

I am not an expert on mortgages and I am not a financial advisor, so this should not be used as financial advice.  But, these are common issues that many financial advisors suggested that I researched for this post.  You need to talk with an accountant or better yet, a financial advisor before making any changes in your personal finances.   

Morris Hagerman is a local real estate agent with Real Estate One in Royal Oak, Michigan.  He serves Berkley and the other Woodward 5 communities, including Ferndale, Pleasant Ridge, Royal Oak and Huntington Woods.  Hagerman is also a member of the Berkley/Huntington Woods Area Chamber of Commerce.  You can contact him by phone at 248-854-8440, email at morrishagermanproperties@gmail.com or visit his web page.