The smartest thing you can do as a home owner is use a 15-year mortgage rather than a 30. You will end up saving a tremendous amount of money over the long haul and you will be free from the bondage of that mortgage in half the time.
But what if you’re like so many of us, and you’ve already purchased a 30-year mortgage?
Here are Three Tips if You Have a 30-year mortgage:
1 Focus on your Non-Mortgage Debt First
We recommend paying off all your non-mortgage debt in an aggressive debt snowball fashion before getting overly concerned with messing with a mortgage decision you already made.
2 Don’t Refinance.
It is rarely a good idea to refinance a mortgage to turn it into a 15 year or to get a lower interest rate. While it might make mathematical sense occasionally, you’ll more than likely find that closing costs and fees might end up costing you more than what you anticipated. Because of this, we recommend performing some common sense analysis on your mortgage with a financial guide – like Ed Ries here at Nuance Financial.
3 Pay Additional Towards Your Mortgage.
If you start adding additional payment towards your mortgage each month, the extra money goes directly against your principal. I would encourage you to look at mortgage pre-payments as an investment into your financial future, almost on par with investing into the market. Now I know that your mortgage rate is far lower than the 8% you might think you’ll get in the market, but remember that having no mortgage payment means you require less money in the future.
Entering retirement without a mortgage needs to be a major goal for everyone that wants to have financial freedom. This means pre-paying on your mortgage is helpful not just for the savings in interest, but because you won’t need to spend as much money in the future, allowing for a lower retirement withdrawal rate.
Example of the Financial Impact of Paying Extra on Your Mortgage:
Mortgage Debt:
$272,000 30-year fixed rate at 4%
Joey had just bought a $272,000 home out in Lakeville Minnesota with a 30-year mortgage. After consulting Nuance Financial, He decided that after paying off his consumer debt, investing up to 15% into ROTH IRA’s & Tax Deferred investments, He would put an additional $600/month towards His mortgage to help Him save money and be financially wise.
Original 30 Year Mortgage Payoff Numbers:
• If He paid only the scheduled Payments for 30 years on His $272,000 mortgage, his total payback amount is $467,485
• He would be making a payment of $1,298.57/month (doesn’t include taxes etc.)
• Total of 30 years
• Total Interest paid: $195,485
Nuance Financial Mortgage Plan:
• Pay $1,898.57/month which is $600 a month extra
• Total amount paid back: $370,399 which will be finished in only 17 years
• $94,086 in total interest savings
• Total Interest Paid: $98,399 – Saving $94,086
Total Mortgage Plan Savings = $97,086
Now the key is that they pay their mortgage off in 17 years rather than 30, and then the have 13 years to invest, save, and prepare for their future.
We recommend always using a 15-year mortgage, but prepaying on your mortgage is one option to lower your overall costs.
The Problem:
There is a huge problem when it comes to this type of approach – people rarely commit to prepaying aggressively in a consistent manner.