Last modified on Oct 17, 2013

Helpful Insights to Having a Mortgage-Free Retirement

Don’t let your biggest debt run your life. There are ways to trim your monthly costs that will move you closer to a mortgage-free retirement.

PAYING EARLY:  Make one extra payment every year and apply the extra cash toward principal; that will cut about 8 years off your 30-year fixed loan.  There are several ways to do this. You can make a full extra payment all at once.  Leyrer suggests using your tax refund. Still, it may be easier to pay throughout the year. For example, if your monthly payment is $1,200, pay $100 each month. Another option: Some banks will deduct half the mortgage payment from your...

Tip #1
Prepay early in the mortgage: Make extra payments as soon as you can after getting a mortgage. Loans are interest-heavy up front and the faster you get that whittled down the better. The first five to seven years are the heaviest of interest.  

Tip #2
Make an annual lump sum payment: Use your tax refund, an inheritance or work bonus, and apply it directly to your principal. Check your mortgage documents to find out how often you can prepay and in what amount.

Tip #3
Prepay a little every month: Request a copy of your loans amortization schedule, which will show the breakdown of interest and principal. For example if you're making a payment for November look at the next line down on the principal reduction line and you'll see that the principal reduction for the next month, December, is say $24. Making that $24 payment early means that your "true" mortgage balance is one payment less after the principal is prepaid. So in essence, you'd be making an extra payment each year.

Tip #4
Beware of bi-weekly pitfalls: A bi-weekly mortgage payment means you're making 26 half-payments instead of 12 monthly payments, so it enables you to pay down your mortgage faster and save thousands of dollars. If taking this route you will need to discuss with your lender and set this payment schedule upfront. 

Tip #5
Red flag your extra payments; It's always important to make sure your payments are being handled properly. Sometimes when the lender receives payments out of the blue, they don't know what to do with them. Make the extra principal payments on a separate check making a note in the memo line that it's to be applied to principal reduction only. Then, when you're doing your income taxes, tally up those payments and make sure they've been applied correctly.

Tip #6
Stay informed: Stay up-to-date on interest rates and new products could save you money. Be aware of any adjustable rate changes and prepayment penalties etc; if they apply you may want to shop for another product that better suits your needs. For example, to qualify for a mortgage you may have started out with a lower-rate adjustable rate mortgage but you may want to switch to a more long-term affordable fixed-rate mortgage later.

When it's Not the Right Move- Once you get a mortgage, aside from making the payments, it's easy to forget about it altogether. But sometimes it is not best for you to pay off your mortgage early. Examples are:

While paying down a mortgage quickly may be a smart move for many homeowners, it's not for everyone. For example, it may not be the best financial move if you have a low-interest mortgage rate and could be putting extra money into a higher-yielding investment, such as a mutual fund or stock.

If you are planning on moving, hold off putting all that money into the old house because you may need it for a down-payment and closing costs on the new one, should your old one take longer to sell.


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