Should I Aim to Pay Off My Mortgage Before I Retire?
This issue looms large for homeowners in their fifties and sixties, particularly those who have recently taken on a new loan. Imagine staring at $2,500-a-month payments that stretch almost as long -- or longer -- than your life expectancy.
Based purely on mathematics, the lower the rate on your loan, the less it makes sense to pay it off. After all, you can deduct the interest on your tax return; the rate is often fixed; and you're using the bank's money to build wealth.
Plus, if you have an ultralow, 5% mortgage, you can almost certainly earn more than that by investing any spare cash in a diversified portfolio of stocks, bonds and real estate income investments. You'd be better off maxing out contributions to your IRA and your 401(k) plan before paying down your mortgage-loan principal, says Barbara Camaglia, a financial adviser in Beachwood, Ohio.
But mathematics isn't the only factor in your decision; there's also peace of mind. "The freedom of not having a mortgage is humongous," says Laren Clein, a financial planner on the West Coast. She is a strong advocate of wiping out at least some mortgage debt ahead of schedule -- unless you're confident that your retirement income will leave plenty of room for the payments.
Remember, paying ahead on your mortgage won't reduce the monthly nut you face in retirement. But in addition to advancing the date when the loan is paid off, extra payments hike your equity dollar for dollar. That increases the chance that you'll be able to trade down to a smaller, mortgage-free home in retirement.
Clein notes that in California, many homeowners have interest-only mortgages. The planner worries that if the state's overheated market cools, some homeowners may end up owing more than their house is worth. If that's a risk, paying down principal is a good idea because it builds equity.
Can I negotiate the real estate agents fees?
It is illegal for the industry to set one commission rate, so real estate commissions are negotiable. On a $176,500 house, a 6 percent commission would be $10,590 -- or $5,295 to each of the agents, your Realtor and the agent who listed the property. Both of them split that commission 50/50 with their respective brokerage firms to cover overhead and expenses. In that scenario, your agent will earn $2,647. If this house has been on the market for a long time and she needs to close a deal, she may be motivated to contribute part of her fee to help you out. It would be appropriate for you to ask, especially if she knew that this property was out of your price range before she showed it to you.
Still, I am concerned that you may be flirting with trouble. Let's say she agrees to give you $500 or even $1,000 of her commission. If that's enough for you to make this deal, you may be setting yourselves up for disaster. The worst mistake home buyers make is getting in over their heads. My best advice is to look at homes that are priced below the upper limit you can afford. You can always upgrade in a few years.
Does paying extra on my mortgage help me if I don't stay in my home for the life of the loan?
Prepaying your principal is like adding money to a savings account called "equity." When you sell this house, you should move all of your equity into the down payment on the next one. The more money you have available to put down, the less money you'll need to borrow for the mortgage. If you diligently move your entire equity into the next home and the next and continue to make principal prepayments, your equity will grow more rapidly and that means your mortgage requirement will continue to shrink until that blessed day when you own your home free and clear!
Selling one house and buying another does not have to interrupt the equity-building process. One cautionary note: Whenever you make a principal prepayment, write a separate check and clearly note that the money is meant to pre-pay the principal. If it's not noted, your mortgage company could apply it to your next monthly payment, which will have almost no positive effect.
What is an ARM?
An adjustable-rate mortgage is a loan with an interest rate that changes, usually in response to movements in the treasuries or the prime rate.
When should you get an ARM?
If you're moving within the next three to five years, the interest savings on an adjustable-rate mortgage means this type of loan probably makes more sense than a fixed-rate loan. ARMs tend to be one to two percentage points lower than the rates on your regular 30-year fixed loan.
