Should You Pay Off Your Home?
The Ferengi and the Yogis
The mortgage on your home is probably one of the biggest monthly expenses you have in your life. Many times people will ask me, should I work towards paying off my home or invest or contribute extra towards my retirement/savings accounts? That is a great question! There are two basic thoughts behind this, and there really is no wrong answer. It is just what you are comfortable with. Are you trying to maximize your return or are you working towards a debt free/worry free life?
If your ultimate goal is debt free living and peace of mind, the correct answer for you is probably to work towards paying off your home! The worst that can happen is that you may not take the benefit of some of your tax deduction opportunities, or maximize your returns. A paid for home can bring a great sense of comfort and peace of mind unlike any other investment you may make. It is ironic that just this morning (4-25-07) on Good Morning America, they were talking about 400,000 new homes coming into foreclosure this month because the people who own these homes can't afford their current mortgages. Most of those homeowners probably opted for adjustable rate mortgages when interest rates were very low and purchased a home much more expensive than they could really afford. Now that the prime rate is around 7.75%, those mortgage payments are pretty expensive.
But let's say for a minute your objective is to maximize your returns. What should you do? There are many variables to consider and you may need to consult a financial advisor to help you evaluate your options, but here are some of the things you should be considering.
Compare Rates of Return
What is your current interest rate on your home compared to the rate of return you are getting from your saving/investments? For example, if you are paying 5-6% APR on your home and are getting a 3-4% interest on your savings, the correct answer may be to pay off your home or pay more towards paying the home loan down.
What Kind of Mortgage Do you Have?
The type of mortgage can make a big difference on the amount of money that is going towards your principal each month. A 30 year mortgage in the early years may have just a small percentage of your payment go towards your principal, whereas a 15 year mortgage will have significantly more. Do a comparison and look at an amortization chart. This will help you understand. If you have a 30 year mortgage, try to make extra payments toward your principal each month.
Could You Invest Into a Retirement Account?
Are you eligible to contribute into a retirement account such as an IRA, 401k, SEP, SIMPLE, etc.? If you are, you may want to contribute extra towards your retirement. The contributions you make may be tax deductible.
If you decide to pay off your home, it is highly suggested you keep a line of credit available against your home equity. Many times it is difficult to get a loan against your home if you have lost your job and are not working. In the event of an emergency and you need to access the equity in your home, you can do so as easy as writing a check.
The Ferengis and the Yogis.��� Which One Best Describes you?
They both own a home valued at $300,000. They both have 15 year mortgages with a 5% interest rate. What should they do with their discretionary income?
By: Rajesh Jyotishi
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