As interest rates rise, is it really smart to pay off your mortgage? It is relative to your situation, salary, and the particular interest rate environment you are in. Also, what about those 15 year mortgages? Are they all that they are cracked up to be? I can show you how you can create your own 15 year mortgage if that is what you want. However, you might want to rethink it by the end of this article.
I have listened to all the pundits out there about paying off your mortgage and taking a 15 year mortgage to help you pay the mortgage off sooner. However, you need to ask yourself why you want to do this? Is it for peace of mind? Or is it because that’s what you hear you should do? When it comes to peace of mind, which is an individual choice that no one should tell you otherwise. Nevertheless, let’s examine what happens when you pay your mortgage off sooner.
15 Year Mortgages vs. Extra Payments
You can go to the bank and get a 15 year mortgage which is typically about a ¬Ω per cent less than a 30 year mortgage. Or, you can just create your own 15 year mortgage by adding a certain amount of extra monthly payments to your principle.
Here is how you create your 15 year mortgage. All you have to do is get your financial calculator out or if you don’t have one then go to “Interest.com”. The hyperlink will take you to my calculations where I used a $150,000 mortgage, at an average rate today of 6.28%, applying $350 extra payments per month. The total payments with these extra principle payments are $1276.50 per month. You can put in your own figures to see how you can create your own 15 year mortgage for your own personal situation.
Now, today a 15 year mortgage that you could get locked in with a bank is around 5.88%. Using your calculator you will see these monthly payments are approximately $1256.08. As you can see from the example above, making the extra payments of $350 per month for the 30 year is the same as creating your own 15 year mortgage. So, why would you want to get a 15 year mortgage and be obligated to the bank for those higher monthly payments? Not to mention the refinancing costs. Instead, it’s better for you to decide for yourself if you want to make the extra payments, especially in today’s times when everything is going up so high, so fast.
Should You Pay Off Your Mortgage Early?
Again, if it is for your peace of mind, that’s fine. Nevertheless, think how the system works and why not play defensive. When you make extra principle payments, it is being applied to the principle balance, not your monthly payments. It won’t change those monthly payments as long as you have a principle balance. So, why not open up a money market account and start making those extra payments and accumulate the interest on that money over time. You can also seek help from the best mortgage brokers in Hertfordshire. They will help you on how to deal practically with all of your finances. They are reputable and reliable professionals in the industry so you can cope up with all of the bills you have to pay.
Interest rates are going up. If you have a low interest rate even less than 7%, your tax bracket will reduce the real mortgage interest more. A person with a 7 % interest rate in a 28% tax bracket is actually paying about 5% real interest after taxes. If savings rates, CDs, or money markets hit 5% or more, you can make more money in those vehicles than by paying off your mortgage. And if your mortgage is 6% or under, it’s even better not to pay it off. Just take your interest rate and multiply it times your tax bracket, subtract that amount which would be your annual real mortgage interest rate. The lower the tax bracket this won’t have as much impact; nevertheless, it still reduces whatever your mortgage interest initially was.
It is beneficial for you to hold onto that money and accumulate it. Then you can decide when you reach that payoff amount whether you are ready to pay off your mortgage.
Some people need tax deductions to offset higher incomes. So paying off a mortgage is not beneficial for them. A lot depends on your salary and total deductions.
I’m surely not saying don’t pay your mortgage off. What I’m saying is play defensive because you do not know what the future holds until you are ready to retire. This extra money that you can accumulate might come in handy to get through a tough time. Once you pay down your principle to the lender, the money is locked in there. Believe me; they want you to pay it off. It’s in their best interest. Yes, it’s great to feel no one can take your home away so paying off the mortgage makes sense. Again, I’m saying to keep it on the side until you need to pay it off. Play defensive when the times are tough. Life finances are all about risk management.
Having no mortgage is important for retirement purposes. But think about this. You never know if that money might come in handy to pick up some cheap, distressed property down the road that can make up for your poor performing retirement funds now. Everything is relative!