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Prepaying your mortgage: Dangerous fantasy?

Posted by Scott Van Voorhis July 16, 2013 07:42 AM

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Ah, yes, to pay down the mortgage early and free yourself from the shackles of bank debt.

For an increasing number of financially stressed  homeowners, it has become the holy grail, the new American Dream even.

But if you are fantasizing about paying off that 30-year mortgage in five or ten years, it's worth doing a little introspection.

After all, why is the idea of living without a mortgage so alluring? Are you, like most of us, weary of the daily grind of trying to cover too many bills with too little money?

Does living mortgage free seem like a golden prospect, freeing yourself of the stress of your largest monthly payment? Frankly, is the allure of it all simply because it is unattainable, or at least unattainable without a massive revamp of your lifestyle and priorities?

Like a lot of things, if you really, really want it - pretty please, with sugar on top, as my five-year-old would say - you probably can't afford it.

Here's a pretty interesting take down of the pre-payment craze by the Business Insider.

While paying down your mortgage early may sound like a financially sound, even wise thing to do, it can be anything but that for many homeowners.

The BI piece takes to tasks a West Virginia government analyst and his wife who paid off a 30-year, $157,000 mortgage in five.

Great, but basically every spare dime went into their mortgage, and, by extension, their house, the most illiquid asset they have.

Here's an excerpt:

In order to double up on their mortgage payments each month, Hatter and his wife put the brakes on their retirement savings, save for their 5% employer contribution. And when they realized how much they'd need to sacrifice to double up on mortgage payments each month, they also stopped contributing to 529 college savings plans for their two young children.

Every homeowner would love to be unshackled from mortgage debt, but there are few homeowners out there who are likely in good enough financial shape to go for it.

And there are probably few marriages that could survive this Parris Island approach to paying down the mortgage either, I'd add.

Meanwhile, prepayment boosters seem inclined to wax on with fantasies about the great riches that will accrue from paying off the bank off early.

Here's one from the HomeActions newsletter.

Strategy No. 2 (Really Aggressive Pay-Down): With this strategy, let's say you decide to get super-aggressive with the accelerated mortgage pay-down idea. You start paying $5,000 per month instead of making the scheduled monthly payments of $2,460. You will pay off his $400,000 mortgage balance in about 8 1/2 years, at about age 53 1/2, instead of paying it off in 28 years, at age 73. You will earn a guaranteed 6 percent rate of return because that is the rate of interest you avoid on the accelerated principal payments. Then, for another 11 1/2 years, you put $5,000 a month into a retirement savings account that earns 6 percent after taxes. You will accumulate about $990,000 by age 65.

Wow, imagine that, a millionaire by 65! You have to read the fine print here, though.

The big savings is based on the premise you are paying 6 percent on your mortgage, which yields extra large savings by paying it off early.

But if you are paying 6 percent on your mortgage, then your first order of business is refinancing down to a lower rate, especially now that rates are headed up again.

And if your credit record or current finances are so shaky you can't refinance, then you certainly shouldn't be embarking on a crash program to pay off your mortgage.

Instead, you need to be salting money away in an emergency fund.


This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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