Prepaying Mortgages

IS PAYING AHEAD ON a mortgage a good investment? We have more on the “invest vs. pay down debt” question later in this chapter. But even if prepaying a mortgage isn’t your best investment, retiring debt-free should be a priority. That way, you’ll eliminate a major expense, thus making retirement more affordable. What if your last scheduled mortgage payment is after your likely retirement date? Consider making extra principal payments.

When you make additional principal payments on a fixed-rate mortgage, you pay off the mortgage more quickly. When you pay extra on an adjustable-rate mortgage, you trim the loan balance faster than scheduled, and that should result in lower monthly payments when your rate next adjusts—unless the interest rate adjusts higher and that swamps the impact of your extra principal payments.

What if you’ve made additional payments on a fixed-rate mortgage and decide you’d like to see an immediate benefit, in the form of lower monthly payments? You might ask your mortgage lender about recasting your mortgage, also known as a re-amortization. With a recasting, a mortgage’s interest rate and remaining number of payments remains the same, but the size of those payments are reduced to reflect the extra principal payments that have been made. Mortgage lenders charge a fee for recasting, typically a few hundred dollars, and may require that you make a onetime extra principal payment of perhaps $5,000.

Your mortgage lender might pitch you a “biweekly mortgage,” where you pay half the mortgage payment every two weeks, rather than the full payment every month. That pays off your mortgage faster, because you end up making an extra month’s mortgage payment every year. Alternatively, some dubious financial firms might offer “mortgage acceleration” services. Either way, don’t bite. You can achieve exactly the same result, and avoid the fees charged for these services, by simply adding extra money to your monthly mortgage payment.

What if there’s no way you will get your mortgage paid off by retirement or soon after? You might take the opposite tack. As you approach retirement, consider refinancing your mortgage with a new 30-year loan or recasting your mortgage. That should sharply reduce your monthly payment, thereby trimming your retirement living expenses. Handling home loans in retirement is also discussed in the retirement chapter.

Next: Jonathan’s Mortgage

Previous: Principal vs. Interest

Articles: Matters of Principal, Pay It Down and Stocking Up