One of our listeners, Randy, is considering making paying his mortgage every two weeks instead of every month so he can pay it off faster. He wants to know if this is a good idea..
We can’t give you a direct answer, Randy, but we will give you nine questions that will help you determine if you should make the extra payments.
#1 – Do you have any other debt?
Chances are your mortgage is the cheapest debt you’ll ever find, after taxes are considered. So if that’s the case, you should pay off your other debt first.
#2 – Do you have an emergency cash reserve?
The general wisdom among financial planners is that you should have somewhere between three months to a year of living expenses in an account that’s readily available.
#3 – How good is your credit rating?
The better your credit rating, the better chance you have to borrow in the future at a reasonable cost should the need arise. When you make extra payments, you’re essentially investing in an illiquid asset. So if your credit score needs some improvement, work on that first.
#4 – How do you feel about debt?
Some people don’t like having any debt at all. If you’re one of them, and if you’re happy with the answer to the first three questions, then make extra payments!
#5 – What’s your interest rate?
This question gets you ready to determine your best financial move. There are two things you need to know:
- the interest rate on your mortgage
- your tax bracket (i.e. how much you’ll pay in taxes on your next dollar of income, that’s called your marginal tax rate).
Multiply your interest rate by (1 – your marginal tax rate) to get your after-tax cost of interest.
#6 – How disciplined are you?
If you’re likely to just spend the extra money if you don’t make extra mortgage payments, then by all means just make extra payments. If you’re disciplined
(or set it up so you don’t have to be), then you’re ready for the next question.
#7 – When do you plan to retire?
In general, the longer you have until you retire, the more aggressive you can be. So if you plan to retire in a relatively short time, lean toward extra payments. If you have a relatively long time before you retire, you’re probably better off investing.
#8 – What could you earn if you didn’t pay off your mortgage early?
You figured out your after-tax interest cost in Question 5. That’s your cost of money. Now you’re going to look at how much you can make from your investments. That’s your projected return. If the return on your portfolio is greater than your cost of money, that’s a sign you shouldn’t make extra payments on your mortgage.
#9 – Will your current portfolio support your desired lifestyle?
If you already have enough money to keep you happy for the rest of your life, why do anything risky? Just pay off your mortgage and reduce your risk even more.
We’ve offered some general advice here. Find a certified financial planner or CPA to help you with your specific situation.
|Want to read more? Here are the
9 questions you should ask before paying off your mortgage
in more detail.
Our bigg quote today comes from Walter Savage Landor:
But you shouldn’t pay down your principal unless it’s in your best interest.
Next time, we’ll share a love story with lessons. Until then, here’s to your bigg success!
(Image by svilen001)