Should I Pay off my House?

Dear Sue,

With all the financial uncertainty right now, my husband and I have been thinking about paying off our existing mortgage in preparation for our retirement.

Do you think such a move is wise? Is there anything we need to know?

Wannabe Wise

Dear Wise,

Equity has never been more important than it is today. I know of only two ways to create equity: through debt reduction and though appreciation.

Since real estate had been appreciating at record rates over the past several years, Americans were encouraged to tap into their home equities as if they were their own personal ATM machines.

They used the equity for college educations, vacations, BMW’s and sometimes other investments. There was very little worry because real estate was appreciating at record rates. As money was taken out it was immediately replenished because of the unprecedented appreciation.

We all know that times have changed. We are now experiencing depreciation. Home values are going down nearly as fast as they went up. Today some banks are freezing those credit lines. People are finding their ATM machines out of order. Many Americans are even struggling to make their house payments. Many are wondering why they should even bother to make those payments since their mortgage amounts are higher than what their property is worth.

In a market of decreasing values, the only way to build equity is to reduce the mortgage debt.

In answer to your question is paying off your mortgage a wise move? There is no “one size fits all” answer. It depends on many factors both emotional and financial. The emotional factor is “peace of mind.” The financial factors include the tax advantages as well as future retirement plans.

What ever you decide to do I recommend that you create an over all financial plan with the assistance of your tax advisor and financial planner.

I recommend that you compare the return on other investments with that of paying off your home. For example, if the interest rate on your mortgage is 5% and your savings bank is paying 3%, it makes sense to make an extra 2% by paying down the mortgage. If you find an investment that safely pays above 5%, it makes more financial sense to put your money there, unless of course peace of mind is of more value to you.

Paying off a mortgage may seem overwhelming. However it can be done one dollar at a time. Many people use their income tax refunds to make annual principal reductions. Making an extra house payment every year can reduce the mortgage period by 10 years or more. Some banks offer bimonthly payment plans to decrease the pay off time. Go on-line and find a good mortgage calculator. Plug in some examples and see for yourself.

When the day comes that you make that final payment, be certain that there is no pre payment penalty and make sure that the note holder signs and records a full reconveyance .

If you need available cash in the event of an emergency, you can always get an equity line of credit.

If you are 61 or older and need money for any reason, a reverse mortgage is also an option.

If you own the property free and clear, and you wanted to sell your home, you will be in a sweet financial position as the banker holding a first trust deed.

Paying off your mortgage can be a matter of good Home $$s and Sense.