BiggerPockets

Plan To Pay Off Your Mortgage

When buying a home or refinancing, the plan for many people was to get a mortgage with the lowest payment without considering principal reduction, and maybe use their home like an ATM machine to withdraw cash.

Lessons from the real estate market may give homeowners a different perspective on managing personal finances. Today, a financially practical approach to mortgage borrowing is to consider keeping a home as a long term place to live, while planning for a specific time to have the mortgage paid off.

Borrowers usually take the path of low payment over a plan to eventually be mortgage free. The idea of owning a home free and clear of any mortgage may be a foreign concept to many, but it's only a matter of time, maybe 15 years or less.

For example, a 15 year fixed rate mortgage can provide a realistic goal of being mortgage free, while saving thousands of dollars on interest payments, instead of a 30 year mortgage. Consider that a $200,000 loan with a 15 year mortgage could save as much as $120,000 over the life of the loan when compared to a 30 year mortgage term.

There is an ongoing debate about the pros and cons of paying off a mortgage. Behind the argument for not paying off your mortgage is the reasoning that you could invest the extra money and earn a higher return, while keeping your money more liquid. That may have been a good reason in the past, but the rate of return on investing now is more questionable, compared to the fact that every dollar paid to reduce a mortgage balance provides a guaranteed return equal to the interest rate on the mortgage.

Another debating point about not paying off a mortgage has been the tax deduction benefit. In order to get an accurate picture of the tax benefit, compare the standard deduction allowed to itemized deductions with mortgage interest. If you paid $20,000 in mortgage interest for the year and received a $2,000 net tax write off, is that a good reason to prolong your mortgage?

Some benefits of a 15 year mortgage include:

• Provides a fixed term strategy to eliminate your monthly mortgage expense.
• Incorporates the retirement of your mortgage into your overall retirement plan.
• Long term investment that guarantees a rate of return by reducing your debt.
• A future with less financial stress and the security of really owning your home.
• Saving a large amount of interest expense on a 15 year term instead of 30 years.

The goal of living without a mortgage is attainable. If you can afford a 15 year mortgage, you set a timetable to one day enjoy the benefits owning your home free and clear. You also have the option of shaving a few years off the term by paying a little extra towards the principal balance each month. 15 year mortgage rates, by the way, are usually lower than 30 year rates.

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