Paying Off Mortgage and Retiring – 5 Reasons Why One Should Come Before the Other

Paying Off Mortgage Before RetirementBeing free of debt is a great way of enjoying your retirement years. Most people agree that paying off your mortgage before you retire is something that will give you peace of mind and more financial freedom. However, many people end up retiring before their mortgage is paid off, which might not be necessarily a bad thing. Like everything when it comes to mortgages, what is best for one home owner may not be the best for another. Essentially, paying off your mortgage before your retirement years is advantageous, but there are cases in which not paying it off is the better choice, especially if getting rid of your mortgage involves a large financial sacrifice (Read: Should You Rely on Home Equity When You Retire? Think Again!).

When is it better to Not Pay off Your Mortgage

Not having to worry about a large debt after retiring will most likely make your life much easier. Unfortunately, paying off a mortgage earlier is not always a good idea. With today’s interest rates, you are probably paying less than 5 percent on your mortgage loan, and more than 10 percent on your credit card balances. Mortgages are considered a good debt, which means that you should pay them off last, and worry more about other type of debt.

Unless you have large assets that you can use while retiring, you should think twice before paying off your mortgage. Your retirement accounts have more tax advantages, so you should put your money into those before paying off debt. An even worse idea is to pay off your mortgage using money from your retirement accounts. You will have to pay a large penalty for the withdrawal, and end up spending more than you would on your mortgage.

Also, if you are able to refinance your mortgage loan, you could be saving thousands of dollars. However, refinancing is expensive and you have to include closing costs in your calculations before deciding if refinancing will save you money, or you should keep paying the mortgage as before (Read: Do You Make These Mistakes? Don’t Kill Your Mortgage Refinance!).

Reasons to Pay Off Your Mortgage before Retiring

There are more reasons to pay off your mortgage before retiring than there are to not pay it off. To find out even more reasons click here. Taking the necessary steps to make sure that your retirement accounts are replenished is very important before deciding whether paying off your mortgage is worth it or not. Here are the reasons why getting rid of your mortgage should come before retiring.

  1. Peace of mind. After years of making large payments each month, you can finally say that you truly own your home. This is especially important after retiring, when your income probably won’t be as large as before, and the chances of generating additional income are thin. Finding a job, investing or starting a business in your retirement years is unlikely, so not having to worry about the risk of losing your home if something unforeseen happens, or about having to make a large payment each month, is a blessing. To learn more about the benefits see this.
  2. Savings in interest. Over the life of a mortgage loan, you will be paying tens or hundreds of thousands of dollars in interest, so paying it off as soon as possible means that you avoid paying all that interest. Even refinancing into a shorter loan will bring great savings, as long as you don’t spend a lot on the closing costs. Not only will you be mortgage free by the time you reach your retirement years, but you can also use the money that you saved for something that will make your retirement much more enjoyable.
  3. It allows you to focus on spending less. The process of paying off your mortgage allows you to focus on saving for retirement, as well. If you wouldn’t have a monthly mortgage payment, you might be tempted to use that money to make other large purchases, like an expensive car. Deciding to pay off your mortgage puts things into perspective and gives you a chance to focus on your future plans.
  4. Build equity. Paying off your mortgage means that, if you ever need money once you are retired, you can take out a loan against the equity in your home or sell the home and have access to all the equity in it. You can use the money to pay your medical bills, buy a condo, or even for traveling (Read: Home Equity Loan).
  5. Avoid higher interest rates if your rate is adjustable. Adjustable-rate mortgages can be either advantageous or disadvantageous, depending on how the interest rate fluctuates. If the interest rate keeps rising, then you might end up with a larger down payment during your retirement years, so paying your mortgage off makes sense.

Not paying off your mortgage before retiring makes sense in some cases, but not having to pay a large bill each month is more beneficial. Unless you have to dip into your savings and retirement accounts to pay off your mortgage, the peace of mind that not having a mortgage brings outweighs the pros of keeping your mortgage during your retirement years.

5 Important Reasons Why You Should Pay Off Your Mortgage Sooner Than Later

Pay Off Mortgage EarlyPaying off a mortgage loan takes a very long time, especially if it’s a 30 year or longer loan, so you might want to pay it off earlier than that. While paying off a mortgage sooner than its term has its disadvantages, like being left without savings or not being able to invest the money instead, it can also be very beneficial for most borrowers. The peace of mind and savings in interest that paying off your loan sooner bring can far outweigh the negatives (Read: Should You Pay for You Home In Cash Upfront?).

A mortgage payment is most people’s highest monthly bill, so getting rid of it will free up a significant amount of money each month. That money can make your life a lot easier. You can afford to pay off other debt, take out another loan, or use it to live better. Unfortunately, in order to pay off a mortgage earlier, you will have to come up with a large sum of money if you want to pay everything all at once, or more money each month if you decide to pay it off by making extra mortgage payments. Unless you have significant savings, inherit a large sum of money, or receive a pay increase from work, you are facing some difficult financial times until the debt is paid.

Ways to Pay Off Your Mortgage Early

There are several ways in which you can take care of a mortgage loan earlier than its term. Some methods are quicker than others, or require a larger sacrifice, but all of them will help you get rid of your mortgage quicker than the loan’s original term. Here are the most popular ways of paying off your mortgage early.

  • Pay more each month or make extra payments. You can add an extra amount to each monthly payment each month in order to pay off the loan early. Alternatively, you can choose to make a mortgage payment every two weeks instead of each month, which will result in 26 mortgage payments made each year, instead of only 12.
  • Pay a large part or your entire mortgage at once. You can use money from your savings, investments, bonuses or an inheritance to pay off a portion of your mortgage or even all of it.
  • Refinance into a shorter term. Refinancing your mortgage loan into a loan with a shorter term will make your monthly payments larger, but, if you can afford it, it will help you save significantly in interest (Read: Things to Remember Before Refinancing a Mortgage).

Reasons Why Paying off a Mortgage Sooner is Beneficial

Depending on several factors, paying off your mortgage sooner than later can be to your advantage (read more here). Generally, the benefits outweigh the downsides, but taking this step is not something that many home owners can afford to do. Unless your interest rate is really low, you should do your best to try and pay off your mortgage loan early. Here are some of the reasons why this is a good choice.

  1. Peace of mind. Like most people, you probably have a lot on your mind. Taking care of your largest monthly bill will surely relieve a significant amount of stress, and make your life and your family’s life much easier. Truly owning a home is a great feeling, and you shouldn’t wait until you are old to experience it (Read: Are You a Twenty-Something Wanting to Buy a Home? Here’s What to Know). Not having to pay a mortgage anymore also means that you have other possibilities of investing and you are more in charge of your financial life.
  2. Savings in interest. With a 30-year mortgage loan you pay almost as much on interest as you do on the principal. Paying the principal early means that you will save tens of thousands in interest. Making just an extra mortgage payment per year can save you thousands of dollars.
  3. Improve your credit score. As long as you have a large debt, you are considered a large risk, and your credit score will reflect that. Once you get rid of your mortgage, your credit score improves, and you will be able to qualify for more credit. You can get new loans, for buying a car or even a new home, because your cash flow will be larger (Read: Top 10 Components for Maintaining a Good Credit Score).
  4. Avoid the risk of losing the home. Investing money while you still have a mortgage is riskier because, if something goes wrong with your investments, you risk losing your home as well. Also, losing a job or having large medical bills will increase the risk of losing your home. If your mortgage is paid off, the home is yours and you don’t risk losing it to foreclosure anymore.
  5. Most times it makes sense financially. Some people will argue that you lose the tax break, or you could earn more if you invest the money. That may be true is some cases, but the tax deduction argument is often exaggerated, and you are probably saving more in interest than you would make on an investment. To read more click here.

Even though there are reasons why paying off a mortgage early is not recommended, most of the times the benefits of doing it are far greater than the alternative. Sure, having cash on hand for emergencies and making other investments makes sense, but so does avoiding paying tens of thousands in interest. But probably the biggest advantage of paying off your debt sooner is the peace of mind that it gives you. Living with the knowledge that you can lose your home if you come across financial problems is very stressful, so paying off your mortgage early not only saves you money, but also allows you to enjoy life better.

Assessing Your Current Financial Situation: Are You Ready for a Home?

Assessing Your Current Financial Situation-Are You Ready for a Home- 150x150Buying a home involves more than just affording the down payment and closing costs. Your lender needs assurances that you will be able to pay your mortgage on time each month and that you won’t default in the future. Assessing your current financial situation will not only help you determine if your lender will approve your mortgage loan, but will also help you find out if you are ready to buy a home. Being a home owner has many benefits, but it is also requires sacrifices and it is very expensive. If you are not careful, you might have an unpleasant surprise when your lender denies your application or, even worse, you realize that you can’t actually afford to own a home after you have made the down payment.

Your financial situation involves more than just having some money saved up when thinking of becoming a home owner. Your credit score, your income, the assets that you own, and your current debt are all very important factors of your financial situation. These factors can decide if you will receive the mortgage loan and can also help you decide if this is the perfect time to buy a home, or wait a while longer.

Your Credit Score

Your credit score will help your lender determine how big of a default risk you are. Based on your score, they will decide whether to give you the mortgage loan or not. Your interest rate will be largely dependent on what range your credit score falls in. Those attractive interest rates that lenders advertise are generally reserved for those with perfect credit scores. Perfect credit scores are obtained over a longer period of time, and are affected by factors such as the punctuality of your payments, your total debt related to the total credit available, and the types of credit that you are using. High credit scores mean lower interest rates, which save you thousands or more in the long run.

Your Income

Knowing how much you own before and after taxes is very important when you assess your current financial situation. Your lender will also want to see documents that show how much you make each month in order to find out if you can afford a mortgage. If you are self-employed, you will more than likely have to show additional documentation that proves your income. It is always a great idea to have all of the paperwork completed before applying for the mortgage just to speed things up a little.

Your Assets

Another factor that must be taken into consideration when assessing your current financial situation is the value of all your assets. Your savings, investments, and tangible property are all considered assets. It might be a bit difficult to determine how much each asset is worth, but it is recommended to underestimate an asset’s value rather than to overestimate it.

Your Debt

Credit cards, mortgages, and other loans, like car loans or school tuition, are all debt that must be considered when assessing your financial situation. Your lender will also be interested in this information, because typically lenders require a certain ratio between your income and debt. If your total debt, including your new mortgage, is more than 40 percent of your income, you might encounter problems when applying for a mortgage loan.

You can only find out if you are ready for a home if you assess your current financial situation. Not doing so can result in your inability to secure or pay off your mortgage loan, which will make your life much harder. Spending time and money only to be refused by your lender or buying a home that you can’t afford can be avoided by doing a little research into your financial situation and finding out if you are truly ready to become a home owner.

Paying Off Your Mortgage Early? Watch Out for Penalties!

Paying Off Your Mortgage Early- Watch Out for Penalties-150x150One of the many things to take into consideration when applying for a mortgage is the fact that, if you plan on paying off your mortgage before the loan term is up, you may have to pay a prepayment penalty. When taking out a mortgage loan, many home buyers tend not to think too far in the future, and so a prepayment penalty clause on the loan contract may go unnoticed at the time of the closing. After a few years, if the home owner decides to refinance or even pay off the mortgage loan, the prepayment penalty may come as a surprise and possibly interfere with his plans.

What is a Prepayment Penalty?

If your mortgage has a prepayment penalty, it means that you will be required to pay a specified penalty to your lender, if you decide on paying off your mortgage earlier than the term that was agreed upon.

In some cases, home owners choose to pay off their loan before the end of its term because they have come across a large amount of money and don’t want to make monthly mortgage payments anymore. But in most cases, home owners choose to prepay their mortgage loan because they have found a better loan from a different lender, with a lower interest rate. Usually, when interest rates decrease, a significant number of home owners choose to refinance, which makes prepayment numbers increase.

If you are not sure if there is a prepayment penalty on your mortgage, the easiest way to find out is by finding the paperwork from when you took out the loan and look for the mortgage note. The mortgage note is a document that promises to repay an amount of money and interest at the specified time, and also includes the prepayment penalty clause.

Prepayment penalties are not necessarily a bad thing. Agreeing to a prepayment penalty can result in a lower interest rate on your loan. Prepayment penalties are bad if you don’t realize that they are included in your mortgage contract at the time of the closing, and end up interfering with your plans and budget in the future.

How Can Paying Off Your Mortgage Early Hurt You?

Some mortgage loans only have short term prepayment penalties, but others have penalties that can be in effect for up to 3 to 5 years. Most people refinance their mortgages before then, so prepayment penalties end up hurting them financially, making the refinance process very expensive, and sometimes even impossible.

There is a type of prepayment penalty called a soft prepayment penalty which only goes into effect if you refinance. You won’t have to pay a penalty if you sell your home, but, unfortunately, most prepayment penalties are the type that will affect both events.

Lowering Your Prepayment Penalty

Prepayment penalties may seem like just a tactic to rob you of some money, but they are legitimate, and will come back to haunt you at the worst of times, if you haven’t been paying attention when you closed on your mortgage loan. Fortunately, there are ways in which this penalty can be lowered.

Check the contract and read the fine print. Find out if there is a prepayment penalty clause in your contract and what it entails. Some prepayment penalties require you to pay a single fee, while others are based on how long you have made payments on your loan. The percent difference between getting out of a mortgage loan after one year or after 4 years translates into thousands of dollars. If you are close to reaching a threshold, then waiting a few months is not a bad idea, and it will save you a significant amount of money.

Contact the lender and start negotiating. You will probably have to speak to a few people before finding the employee who has the power to help you, or at least answer your questions, so don’t give up after talking to the first person who answers. There’s a strong chance that your prepayment penalty will be reduced if you politely present your case and ask for a reduction. Make sure that you make note of everyone you spoke to, and try to get the prepayment penalty reduction in writing.

A prepayment penalty can be a very unpleasant surprise at a time when you have taken some important decisions, like paying off your mortgage loan or refinancing. Making sure that you thoroughly read all the documents required at closing before signing them will save you a lot of trouble in the next several years. Also, remember that prepayment penalties are not a bad choice if you are trying to reduce the cost of your loan. A lower interest rate acquired by agreeing to a prepayment penalty will save you a significant amount of money over time.