If you can afford it, it might be simple to pay off your mortgage earlier. But should you?
That’s a complicated question. Homeowners with low mortgage rates may be better off putting extra money in a Roth IRA or 401(k), both of which might offer a higher return than paying off the mortgage.
Then there’s the college aid factor. If you’re applying for need-based aid for your kids, that home equity could count against you with some colleges because some institutions view equity as money in the bank.
If, after those caveats, you want to pay off your mortgage early, here are four ways to make it happen.
1. Refinance with a shorter-term mortgage
You can pay off the mortgage in another 15 years by refinancing into a 15-year mortgage.
Let’s say you got a 30-year fixed-rate mortgage for $200,000 at 4.5 percent. Then, five years later, you can refinance into a 15-year loan at 4 percent. Doing so pays off the mortgage 10 years earlier and saves more than $60,000 (if you exclude closing costs on the refi).
2. Pay a little more each month
Divide your monthly principal and interest by 12 and add that amount to your monthly payment for a year. Result: You make the equivalent of 13 payments in 12 months.
Let’s say you got a $200,000 mortgage at 4.5 percent. After five years of making the minimum payments, you add an extra 1/12 of a month’s principal and interest to each monthly payment. Doing so pays off the mortgage three years and three months earlier and saves more than $18,000 interest.
3. Make an extra payment every year
Let’s say you do this starting the first month after getting a 30-year mortgage for $200,000 at 4.5 percent. That would save more than $27,000 interest, and you would pay off the mortgage four years and three months earlier.
4. Throw ‘found’ money at mortgage
Get a bonus? A tax refund? An unexpected windfall? However it ends up in your hands, you can funnel some or all of your newfound money toward your mortgage.
Let’s say you got a 30-year, fixed-rate mortgage for $200,000 at 4.5 percent. Then, five years later, you can make an extra $10,000 lump-sum payment. Doing so pays off the mortgage two years and four months earlier, and saves more than $19,000 in interest.
The upside: You’re paying extra only when you’re flush. And those additional payments toward the principal will cut the total interest on your loan. Read more at The Seattle Times. Story by Dana Dratch.