Paying off Your Mortgage Early? Consider These 4 Factors

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The feeling of being mortgage-free is priceless, and the security of owning your “castle” outright — especially during times of financial upheaval — can help you sleep more easily at night. For millions of people, accelerating that final mortgage payment makes good financial sense.

In some circumstances, however, the money you would spend making extra payments might be put to better use. It really depends on your unique personal financial situation. So, before you start accelerating your mortgage payoff, here are four factors to consider.

1. Mortgage Interest Rates vs. Investment Rate of Return
Compare the interest rate on your current mortgage loan to the rate of return you’re getting on your investments, including your retirement savings. If that investment rate of return is substantially higher than your mortgage interest rate, it may make more sense to add to your investments rather than paying down a low-interest mortgage early. Alternatively, when rates of return are low or unpredictable, paying down your mortgage and building up home equity may be the safest plan.

Remember, though, that investment returns are not guaranteed. Many people learned this valuable lesson during the financial crisis of 2008, when they watched large chunks of their retirement savings vanish.

The tens of thousands of dollars in interest savings that come with paying down your mortgage early, on the other hand, are absolutely guaranteed. So is the relief that comes from being mortgage-free.

2. College-Age Children
If your children are already out of school, or are paying their own way, paying your mortgage off more quickly makes good financial sense. But when you have children in or about to attend college, it may not.

For one thing, financial aid officers may take your total home equity into account when they determine if and how much money your family can receive to offset higher education costs. If you’re looking into needs-based college funding programs, stronger home equity could translate to less college aid for many schools.

On top of that, student loan rates are typically higher than mortgage interest rates, so it may make more sense to minimize student loan debt than pay down a low-rate mortgage.

Many families tap into retirement savings to manage these debts, but that can be costly, in more ways than one. On top of potential taxes and penalties, when you take money out of your retirement accounts, you lose all of the potential earnings that money could have brought.

One way to manage paying for both college and your mortgage — without drowning in a sea of debt or undermining your retirement — could involve judiciously tapping into your permanent life insurance policy.* Prudent withdrawals of or loans against the policy’s available cash value can help you pay for college, without compromising your ability to pay down your mortgage and preserve retirement funds. Plus, with some specialized policies — such as indexed universal life insurance — you can participate in potential stock market growth without risking any of your principal if the markets take a dive.

3. How Close You Are to Retirement
As you approach retirement, reducing debt and monthly expenses becomes ever more appealing — and for good reason. Once you enter retirement, you may be living on a fixed income, so minimizing monthly expenses is the best way to improve cash flow.

Since the late 1990s, the number of older homeowners with outstanding mortgages increased, even though home ownership rates did not. Between 1998 and 2012, the percentage of homeowners age 65 and older carrying debt increased from 23.9% to 35%, while home ownership rates declined by 1.5%. What’s more, during that same period, the average amount of debt jumped a whopping 86% — to $82,000.1

Paying off a mortgage as you approach or enter retirement may offer the best shot at both financial and shelter security. Getting that looming mortgage monkey off your back is yet another good reason to consider policy loans and withdrawals from permanent life insurance policies with cash value. *

4. How Long You Plan to Live There
If your current home is just a temporary stop along the way, and you plan to move within a few years, throwing extra money toward paying down your mortgage may not be the best strategy. But millions of Americans treasure their family homes and couldn’t imagine living anywhere else. They look forward to years of children and grandchildren filling the rooms with love.

If you feel that same way, securing your property by paying off a mortgage as soon as possible makes perfect sense. After all, having house security also can carry you through lean financial times — in the event of a lost job or sudden disability, during sharp market downturns, in the face of overwhelming medical bills, or after retirement when income declines.

Taking Action
After considering these four factors, you’ll be able to tell whether paying off your mortgage early makes sense. If it does, don’t wait – get started today.

* Withdrawing funds from your permanent life insurance policy will reduce the policy benefit.

Source: 1 “Home Equity Patterns Among Older American Households,” Urban Institute, October 2016.

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