Who wouldn’t want to pay off his or her mortgage as quickly as possible? But, is making additional payments or over-payments towards your mortgage the best wealth management plan? A well-thought-out financial strategy could determine where you should focus your money to maximize the value of your dollar.
Paying Off Your Mortgage
Timing is everything. If you’re in the latter half of your mortgage, it’s exciting to see an end in sight and tempting to hurry it along. However, the best time to make additional payments towards your mortgage is at the beginning of your loan. By paying an extra $100 a month on a 30-year-loan, you could reduce your principal and save up to $20,000 in interest depending on your terms.
By contrast, if you pay more of your mortgage in the later years, you won’t reduce your total interest burden as quickly, but you will build equity in your home. Mortgage interest is also not the same as other types of debt. By itemizing your deductions on your income tax, your mortgage interest is tax-deductible. In addition, if you need to reduce the amount of taxes you owe, keeping your mortgage might be the answer.
It’s also worth noting that many mortgages are structured for you to pay more towards your interest in the early part of the mortgage and have you pay more towards the principal in the latter stages. If you want to take full advantage of making additional payments early, you’ll need to notify your lender to apply the additional funds to your principal.
Another factor to take into considerations is compensation packages. Some companies offer robust compensation packages tied to company stock. Liquidity events related to company stock or compensation packages may present you with the option of paying off your mortgage entirely instead of other alternatives. Additional analysis should be examined when considering the value of paying off your mortgage completely and your mortgage’s internal rate. The Loan Amortization Calculator under the Resources section of our website helps you look at different scenarios and the implications of paying off your mortgage early.
Saving for Retirement
It’s never too late or too early to save for retirement. But when you have a mortgage, it can be challenging to decide where to focus your earnings. The earlier you start to save, the more time your money has to grow through compounding interest.
After ten years, with an initial investment of $10,000 and a $500 a month contribution, your retirement savings could have an estimated return of 6.5%, worth $103,779. If you save for 20 years, you could save up to $283,103. This amount more than doubles because of compounding interest over time.
Mortgage vs. Retirement Savings
So what should you do? Invest in your retirement early or pay off your mortgage early? That depends on your situation. The drawback to investing in your retirement first and not your mortgage is that you’re keeping a debt that’s accruing interest and costing you money. The longer the debt is outstanding, the more interest charges you’ll pay. The drawback to investing first in your mortgage is that you won’t see the long-term benefits of compound interest on your retirement savings.
Between these two choices lies a compromise: Fund your retirement savings while making small additional contributions toward paying down your mortgage. Even small contributions can make a difference in the early stage of your mortgage by reducing your interest.
Trust Concentrum Wealth Management With Your Family’s Financial Future
Choosing where to focus your money can be a daunting task, and at Concentrum we’re here to help. We are devoted to ensuring that our clients and their family feel secure and confident with their financial strategies at every stage of life.
Ready to start creating a financial strategy that’s right for you? Call today at (408) 840-4030, or contact our team online.