Early payoff

Ask Our Broker With Peter G. Miller

By Peter G. Miller
CTW Features

Question: We expect to retire in the next year to 18 months. We have a mortgage on our house and the remaining balance is about $60,000. We have the cash to pay off this debt, but does it make sense to prepay the mortgage before we retire?

Answer: While prepaying the mortgage often is an attractive idea, it may not be the best use of your funds. Prepaying the mortgage will produce several benefits.

First, your expenses will be reduced in the amount of the monthly cost for principal and interest. It can be a significant cash flow savings, but you still will need funds for property taxes, insurance and any HOA fees.

Second, with less debt your credit score can increase.

Third, with smaller monthly costs, the money saved from prepaying the mortgage can be used to reduce other debts or increase savings.

However, the real question is whether you might do better by using the money in other ways. For example, credit cards have notoriously high interest rates. If you can eliminate credit card balances – and not create new credit debt – then paying down credit cards can be a real money saver.

Car loans might seem like a good candidate for prepayment, but vehicle financing is often structured with the so-called rule of 78s, a lending approach that moves much of the interest cost toward the start of the loan term, thus reducing the benefit of prepayments.

However, paying off a car loan may be attractive if it simply results in a lower monthly cost of living.

If you have a vehicle loan financed with simple interest like an ordinary mortgage, then prepaying can be very attractive because it will result in both lower monthly costs, as well as the repayment of the loan without an excess interest cost.

According to the Federal Reserve Bank of New York, student debt has gone from $260 billion in 2004 to $1.3 trillion at the end of 2016. Not only is student debt enormous, it can be a better prepayment target than a mortgage. Why? If you get into financial trouble and go bankrupt, student loans are extremely difficult and often impossible to discharge.

Lastly, it simply may not be a good financial strategy to prepay a mortgage. For example, it’s generally easier to come up with monthly payments than to accumulate large amounts of money – $60,000 in this case. If the cost is affordable, it might be worthwhile to make monthly payments until the debt is extinguished and hang on to the cash for emergencies.

© CTW Features

Peter G. Miller is author of “The Common-Sense Mortgage,” (Kindle 2016). Have a question? Please write to [email protected].