We have already looked at different ways of paying off mortgage (articles #2 and #3) by making additional payments (prepayment). However, mortgage was not supposed to be paid off in 30 years only. Mortgage is an important part of the budget, and its pay off term should be determined by the budget, no matter what kind of mortgage had been chosen by you at the time of home purchase. However, there are so called ‘short’ mortgages that are supposed to be paid off in 15 or 10 years. They should not be confused with 3-, 5-, 7-, and 10-year ARMs and Balloon mortgages. All of them are, in fact, the same 30-year mortgages but split into several periods with different interest rates.
10- and 15-year mortgages appeared on the market to satisfy the demand which came mainly from those customers who have decided what their retirement age is going be. Most of them are people over 40 years of age. For any retired person, the possibility to reduce monthly payment for his home by getting rid of mortgage payment is, undoubtedly, more than welcome. Keep in mind, however, that you will still have to pay property tax, homeowner’s association fee, and home insurance.
Apart from the social aspect of retirement, there is also an investment one. It is common knowledge that by paying off the mortgage we invest funds at the interest rate of our mortgage. That is, if we pay off mortgage at 4% interest, the funds we invest in the mortgage payment bring us the same 4% interest. Therefore, it is clear now that if there is a product in your budget that can earn you more than 4% interest, – that’s where you should invest. And the other way round: if there is no possibility for you to earn more than 4% interest, than it makes perfect sense to invest into the payoff of your mortgage. This is just a basic example but it gives you an idea of what to pay attention to when planning an aggressive mortgage pay off.
For those who have their own business, the interest on the investment in that business is most likely higher than the mortgage interest. For them, to speed up the mortgage payoff is economically inexpedient. Please, bear in mind that apart from economic, there might be other, equally important reasons, for making such decisions. For those of us who don’t own a business but earn a salary, it’s worthwhile comparing the return on the mortgage investment with the profit from the pension funds. If, for instance, pension funds earn more than 4% (from the previous example), it makes sense to invest in those funds. In case it’s lower than 4%, the best solution is to invest in the mortgage payoff. For this category of homeowners, 15- and 10-year mortgages are the most expedient.
To sum up: you mortgage payment is usually the highest in the family budget, therefore it requires your utmost attention and regular control. We have looked at a number of examples to see the hidden mortgage potential like prepayment of mortgage and minimization of payment. So, the sensible thing to do is to start using those possibilities. My advice: do your mortgage analysis TODAY to determine the ways of optimizing your mortgage payoff without delay. Always happy to share my knowledge and experience with you. My consultations on optimizing the mortgage or choosing the right type of mortgage for your real estate investments are free of charge.
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