Does it make sense to pay off your mortgage?

Good morning all,

I was talking to Chip and Kyle yesterday about our family trust and will, and we got around to the topic of mortgages of all things.  Most, if not all of you are home owners now, staring down the barrel of a lifetime of debt.  We got to talking about ways to accelerate paying off your mortgage faster, or whether or not it even made sense.  

There are a lot of variables to consider, for instance, is the home you currently own the last home you’ll ever buy?  Do you home to keep it as an investment rental property after you buy the next home?  Do you want to have the smallest monthly mortgage payment possible so you can make investments elsewhere with the balance of your discretionary income?  

I am probably part of the last generation that viewed it as a badge of honor to own my house outright, unencumbered with a mortgage.  Given California property tax rates, I’ll always carry that annual burden, but owning my home will bring it’s own degree of freedom.  I think I got that from my dad.  Many of you, however, may not have that motivation nor carrot.    However, I wanted to share some thoughts and ideas around ways to cut out years of mortgage payments.

Over the past year, rates have increased significantly.  Some of you may have taken the opportunity to refinance, or better yet, switch from a 30-year to a 15-year loan.  Bravo!  Kim and I did that a few years ago and went from 4.5% down to 3.125%, and only increased the monthly payment by a couple hundred dollars per month.  But the benefit of taking out 15 years on our loan was huge.  When rates go back down (and they will someday), consider switching to a 15 year loan.

In the meantime, there are 2 payment strategies you can employ.  Several of you on this email have careers in sales and therefore, earn bonuses and commissions.  Consider making 1 additional PRINCIPAL ONLY payment each year (you will need to work with your lender to specify these conditions).  Use your commissions or bonus (you won’t miss it) and this will cut out about 5 years off a 30 year loan.

The other option is to make an additional PRINCIPAL ONLY payment each month (again, work with your lender so they don’t apply it to interest as well).  Some of you may not be aware, but early in your loan, most of the payment is allocated toward interest so you aren’t actually paying down your loan.  If you can start designating money toward the principal, your loan amount decreases faster.  

The other thing to consider as you get older (I have friends my age that have done this when rates were low 3 years ago) is refinance to a 30-year fixed at 2%, lower their monthly payment with no intention of paying off their mortgage, with the knowledge that they will just have a small payment for the rest of their lives.  It’s just about what you’re comfortable with.

At the end of the day, it is your money and you should start thinking about how to make it work for you, how to make it last and how to plan for the long term, your children’s future and your retirement.  It is never too early to start charting out a plan.

Have a great and prosperous week!

Al