Paying off your loan early makes sense in today’s housing market

The most recent stock market meltdown saw the investment earnings of many Americans decline rapidly since the 2008/2009 stock market crash. Since that time, Americans have also been inundated with a mortgage meltdown, a real estate implosion, and the loss of millions of jobs...many expected never to return. The last three years have changed our buying habits, how we look at debt, and especially how we view retirement. The depression-era belief was that you bought your home and paid it off – owning your home free and clear by the time you retire. Many today (usually financial advisors or investment people) preach the idea of using other people’s money….”the bank” in the form of a mortgage…… in an effort to make greater returns in the stock markets.  Sounds great, right? Except when economists and financial people refer to the last decade in the stock market as the “lost decade” where the markets returned nothing? Or in the last half of 2008 and into 2009 when the markets on average lost 50% of its market value?  Unfortunately, there are just no guaranteed investments anymore…..except when you look to pay your home mortgage loan early.  Taking such an option is a 1^st step to planning for retirement.

Today, homeowners can get near record low mortgage rates. Even if they refinanced a few years ago, the market is quite favorable to reduce the mortgage term to a 10, 15, 20, or even 25 year term. Such an option can save thousands of dollars in compounded interest payments over the life of the loan. When a homeowner pays any additional money per month to principle through a refinance of an old loan to a lower interest rate will save simple interest. However, the compounding effects allow a homeowner to pay their loans early, often saving tens, if not hundreds of thousands of dollars in mortgage payments.

What happens if you are not eligible for refinancing or cannot afford the new payments? Simply paying extra automatically through a direct payment allows homeowners to pay as little as $25 extra per month. Such an extra payment would save over 2 years of mortgage payments on a $150,000 loan over a 30 year term. Others still may want to take paying off their homes earlier through a bi-weekly payment program. Such options allow homeowners to pay their mortgage automatically ever two weeks or 26 times per year, the equivalent of a 13^th mortgage payment every year. Using the same example above, a homeowner would save over 3.5 years. Such an option works quite well….but comes with a catch, since transactions are usually orchestrated with the help of a 3^rd party company, most banks charge an upfront fee ranging anywhere from $295-$595 plus a per transaction fee from every payment. This often can make such an option not worthwhile.

Is refinancing worth the time and effort? Or should I just opt to pay a little more per month?  Determining what is best for each individual is a personal decision that does not fit everyone the same. However eliminating the mortgage payment, usually a family’s largest expense is a key step toward successfully retiring with additional cash flow.  Best of all….as long as the mortgage payments are made consistently and on-time, there is no risk of unstable markets, stock market declines or housing crashes.  Regardless of the decision you decide to pursue, make sure to speak with a qualified, licensed, and experienced mortgage consultant to best analyze your options.