Save More or Pay Off Your Mortgage?

Save More or Pay Off Your Mortgage?

As you get closer to retirement, should you save more or pay off your mortgage?  This was a question we received from a listener.  Let’s look at the key factors of your decision.

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Today we have a question from Laura. She writes, “My husband and I will be 52 years old this year. Should we focus on saving more for retirement or paying off our mortgage?”

Why Pay Off Your Mortgage Before You Retire?

Your mortgage payments are typically one of your biggest expenses. Not having that expense frees up money for other things or reduces the stress on your savings. We like to see people not have a mortgage when they go into retirement.

An Example:

Laura and her husband need $2,000 per month from savings to cover their expenses—including their mortgage. Using the 4% rule as a basic guideline, they would need about $600,000 in savings.

save more or pay off mortgage

Their mortgage payment is $800 per month. If they pay off the note before retirement, they would only need about $1,200 per month from savings. Using the 4% rule, this means they only need about $360,000 in savings. It is a significant difference.

Save More Pay Off Mortgage

What Factors In Your Decision?

If you are trying to determine whether you should pay more on your mortgage or save more, ask these questions:

If you keep your mortgage payment the same, will your mortgage be paid off by the time you retire?

If the answer is yes, consider adding extra funds to your retirement savings. You may want to think about using a Roth IRA, Roth 401k, or other types of after-tax savings? If the answer is no, you may want to dig a little deeper.

Will paying more on your loan eliminate your mortgage by the time you retire?

If the answer is yes, consider paying extra on your note.

How much have you already saved and how much are you saving towards retirement?

If you have been a good saver and have a good foundation, it’s easier to favor paying extra on your loan. But if you have not been a good saver, you may want to place a higher priority on your savings.

Talk to a Certified Financial Planner™ Professional

There are a lot of moving parts to this and it is a great thing to discuss with a financial planner. They can help you build a strategy that makes sense for you and helps you achieve the best possible outcome.

 


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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Should I Use My Savings To Pay Off my Mortgage?

Should I Use My Savings To Pay Off My Mortgage?

This question is from Karen. She asks, “With interest rates so low, we aren’t earning anything on our savings. I’m also worried about another significant drop in the stock market. Should I take money from my savings to pay off my mortgage?”

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There are two parts to this. One is eliminating debt. The other is what is the better use of your money?

Paying off debt is never a bad thing, especially as you get closer to retirement. According to the Employee Benefits Research Institute, the largest annual expenditure for people 50 and older is housing. If you can pay off your mortgage before you retire, it can help you have a more successful retirement.

There is also a huge psychological boost to being debt-free. What happens if the economy shuts down again and you get laid off? Not having a mortgage payment can reduce your stress. It’s less stressful knowing you don’t have to come up with $1,000 each month when you’re not working. We cannot underestimate the value of being debt-free.

What is the best way to do this? Here are some factors to consider. These apply whether you’re using a lump sum or paying extra on your principal. 

Compare interest rates

The first thing is to compare your current interest rate to what you earn on your savings and investments. If your mortgage interest rate is high, 4% or more, and you’re earning 0.75% (or less) on your savings, this decision is easy. The difference in the cost of your money compared to what you’re earning is significant. Using your savings to pay down or pay off your mortgage makes a lot of sense. If your interest rate is closer to 3%, and you’re invested in something that has a potential to earn 8%, the math changes.

Your age

The second factor is your age. For someone under 40, the value of compounded returns from investing can be better for your future. If you are closer to retirement, the benefit to paying off that mortgage is more valuable.

use savings pay off mortgage
use savings pay off mortgage

How long will you live there?

Are you planning to stay in your house for a long period of time? If you’re planning to remain there for several years, paying off the mortgage makes more sense. If you’re planning to sell your home in the next 36 months, I’m not sure the answer is as clear. You may not want to pay off your mortgage if you plan to sell it in the very near future.

Tax costs

What are the potential tax costs to raise the funds to pay off your mortgage? Does that come from an IRA or a 401k? If it does, then the entire distribution can be taxable.

Here is an example. If you need $100,000 to pay off your mortgage, you may need to withdraw $133,000 from an IRA. The extra amount will cover the taxes. That is a very expensive way to pay off your mortgage.

Selling stock to pay off your mortgage can also result in a significant tax cost. Your sales proceeds are $100,000. You paid $50,000 for those shares. You will incur $7,500 in capital gains taxes and some additional state income tax. That is also an expensive way to pay off your mortgage.

If the money is in a savings account, there is no tax cost to use it for your mortgage.

Paying off debt is rarely a bad choice, but you need to look at it from all angles and make an intelligent choice.

use savings pay off mortgage

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Should You Refinance Your Mortgage?

Should You Refinance Your Mortgage?

One of the things not mentioned much in the wake of the big stock selloff was the impact on bonds and interest rates.  This has pushed the rate on 15 and 30 year mortgages to levels we haven’t seen since 2012. Today we’ll answer the question, “Should you refinance your mortgage?” (read more below)

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The Coronavirus Is Also Affecting Bonds

Most of us are aware of what has been going on in the stock market in the past few weeks. Lots of volatility. Big down days, big up days. Just crazy swings.

But, something interesting also happened that nobody really talked about. Yields on bonds plummeted. The yield on 10-year treasuries fell below 1% for the first time ever. And for a moment, it fell below 0.5%

Why is this important? Mortgage rates are closely linked to the yields on 10-year government bonds.  And these record low yields have created a surge in demand to refinance loans.  So, should you refinance your mortgage?  Here are some key things to consider. 

These falling yields mean the interest rates for a mortgage have also dropped. Mortgage rates hit an all-time low in 2012. And we are testing those levels again.

Is it time to refinance your mortgage

Is Now The Time To Refinance?

It may be a good time to consider refinancing the note on your house. So what are some of the things that factor into your decision to refinance or not?

Mortgage Refinance

1. How Much Interest Will You Save?

It takes some time and know-how to compute this. But you can compare how much interest you will pay on your current mortgage to what you’ll pay when you refinance. If there is significant savings, it’s worth looking deeper. 

 

Bonus Tip:

Refinancing may reduce your payment. But consider keeping your monthly payment the same. The extra gets applied to your principal. You’ll pay off your mortgage faster. And you’ll save even more in interest expenses.

mortgage refinance

2. How Much Will It Cost?

Refinancing your loan means some upfront costs. You have origination fees, closing costs, appraisal costs, and maybe some other fees. Do those fees justify the potential savings?

Here's an example

Current Loan

Jane and Bob purchased their house about five years ago.  Their original loan was for $150,000.  The interest rate was 4%.  They have made 60 payments on their house.  

Over the rest of their loan, they will pay about $79,945 in interest expenses. 

Refinance

After looking into refinancing at lower rates, they discovered they will pay about $3,000 in origination fees, closing costs, and other fees.  

The interest rate on their new loan is 3%.  They extend their repayment period by 5 years.  Their monthly payment decreases by $130 per month.  And over the life of the loan they will save over $7,700 in total interest expense.  

Is It Time to Refinance Your Mortgage
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But wait, there's more

They keep their payment the same!

Jane and Bob elect to pay their original payment.  This means they pay an extra $130 per month on the new mortgage.  They will pay it off in 22 years—that’s earlier the original loan.  

Also they will save over $28,000 in total interest costs!

refinance your mortgage

3. Do You Need To Do Major Repairs Or Updates To Your Home?

Over time big things need repaired or replaced. A new roof, a new driveway or new flooring are all big-ticket items. For some, the only way to make those expensive repairs is to tap into the equity they have accumulated. This may be a great opportunity to consider that.

The coronavirus scare has created an opportunity to lower your interest costs. But be careful, check your numbers, and make sure it is the right thing for you to do. If you have questions, talk to a financial planner you know and trust.

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Do you have a question? Would you like to talk about how we can help you plan for a better retirement?
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What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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