We all want to get out from under our massive mortgage debt. So what is the best way to pay off the mortgage quicker – and not significantly impact your ability to retire? The answer is a variation on the good old “Pay every two weeks instead of once a month” approach. Increasing the number or frequency of your payments, even marginally, can greatly reduce the amount of interest you pay and thereby, reduce the number of years you pay toward the mortgage – by about seven years, if done diligently.
However, making payments every two weeks may not be ideal for a number of people due to personal or work related circumstances. So, I have an approach that will alleviate this pressure AND still achieve the same benefits as making bi-weekly payments. Just do the following: Make two additional payments (principal and interest, not taxes, insurance, or other escrow stuff) anytime throughout the year and you achieve the same objectives as above – within a year or so. This approach is based on simple math and is flexible and free. You can make the extra payments when it is most accommodating – bonus time, tax return time, etc. – rather than being “under the gun” every two weeks to pay your mortgage; I hate that kind of pressure.
The best part about this process is the benefit you gain in the long term. Those two extra mortgage payments per year could be applied to retirement savings, but I don’t the trade-off is worth it. Some may disagree with me on this, but I would rather own my home, outright, at age 65 and sacrifice a few extra bucks meant for my 401K and/or IRA. Here some more reasons why:
1. You always need a place to live and having your own gives that peace of mind – unless you like socializing with individuals in shelters.
2. Unfortunately, unless you are really wealthy, you are at the mercy of the prevailing economic environment. Therefore, if you happen to start retirement in the middle of a recession, chances are your portfolio will be significantly lower than the guy who started withdrawing five years earlier. If historical trends hold, chances are your house will maintain more of its value during a recession than your stocks and bonds. The housing market may currently be depressed, but most people are not losing 50% of their homes value as is happening with a number of out blue-chip stocks currently (Bear Stearns anyone?)
3. It is far easier to pull equity out of your house than in the recent past. Specifically, although costly, reserve mortgages are a gem, especially if you have no children (or don’t like your children!) and therefore don’t feel a need to leave assets behind after you go to the big sandbox in the sky (deep underground, for some of you!).
4. Many economists believe we are entering a long-term high inflation environment. If true – and I agree – then inflation will have much more impact on liquid assets (stocks/bonds/funds) than hard assets (real estate). In fact, although you are paying more for your day-to-day consumables, your house will likely appreciate at the same rate of inflation, thereby benefiting your net worth – if not your day-to-day pocketbook.
Conclusion: Pay off that mortgage before you hit 65, even if it means less retirement savings. And if you can refinance to a lower rate along the way, even better!