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Personal Finance 101: Paying Off Your Home Mortgage

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Paying off your mortgage early can save you a significant amount of interest and provide you with a sense of security. But it's an important decision that you should take in the context of your overall personal finance planning. Some important factors to consider are other outstanding debts, emergency and retirement savings, tax deductions for mortgage interest, the market value of your home, and interest rates.

Getting the most for your money

When interest rates on CDs and money market accounts are at all-time lows and the stock market has tanked, paying down debt seems like the best way to get a better return on your money. The question then becomes which debt? If you are carrying credit card debt at 12 percent and your mortgage is at 6 percent, it makes sense to pay the credit cards first. Also, the mortgage interest is tax deductible, making your effective rate even less.

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If you have a 401(k) plan at work and your employer matches your contribution, you should make sure you get the match before you use the money to pay down your mortgage. Otherwise you're leaving money on the table. You also reduce your income taxes by contributing to a retirement account.

If you are "upside-down" on your mortgage, where you owe more than your home is worth, paying down your mortgage is probably not a good idea. If you were to lose your job or suffer some other financial hardship that throws you into foreclosure, the extra amount you paid against your mortgage would be lost.

Finally, when home prices go up, a mortgage gives you leverage. You are using the bank's money to finance an increase in the equity in your home. If you pay down the mortgage, you're using your own money.

Priorities

Having a debt-free home is a major part of overall financial security, but other things can come up such as unexpected medical bills, repairs or a job loss. Having an emergency fund is an important part of your personal finances. Also, you shouldn't neglect your insurance needs such as health, long-term disability and life insurance. You may have other priorities in addition to your home such as saving for college, taking that vacation you've always dreamed of, or starting your own business. Paying down a mortgage should take its rightful place among all your priorities.

How to pay down your mortgage loan

If you are close to retirement, don't have much other debt, and you have an emergency fund, paying off your mortgage can make a lot of sense. Getting rid of a mortgage payment will significantly ease your living costs during retirement.

One way to reduce your mortgage debt is up front. Based on your personal finances, calculate how much you can afford to pay each month, then buy a cheaper house but make the same payment. You'll pay off that smaller mortgage much faster. Then you can use the interest you've saved to upgrade to a better home. Also, you may be able to pay your mortgage faster by refinancing from an adjustable variable rate to a fixed rate. You could also get on a bi-weekly payment plan instead of monthly. If your bank doesn't accept bi-weekly payments, you can still make an extra payment each month. Be sure to let the bank know that the extra payment is against principal and not interest. If you keep this up over the life of the loan, you could take several years off the mortgage and save thousands of dollars.






Video: How to Properly Manage Your Money Like the Rich | Tom Ferry

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Date: 12.12.2018, 18:51 / Views: 54232