Real Estate

Real Estate – John M. Lee

I have been asked this questions several times this past month: “Should I put more towards my monthly payment to pay off my mortgage earlier?” That is a great question and the answer depends on your personal financial picture.

There are many mortgage acceleration programs available to help consumers pay off their obligations sooner. Many financial planners will advise not to pay off early, but some homeowners are deciding that they want the peace of mind of owning a home free and clear more than the tax advantages or putting the extra funds into other investments.

Most of the available mortgage acceleration programs work with a first loan and a line of credit. The idea is to minimize the interest paid, so all your income is deposited into the credit line and you use the credit line to pay the first mortgage off quicker and also use it  for your daily living expenses.

Companies have developed software that tracks your income and expense habits, analyzes the interest rate structure on both loans and makes recommendations on how much mortgage to pay every month. Companies who promote these types of programs claim that it will pay off a 30-year loan in half to a third of the normal time. The administrative cost for these programs ranges from $2,000 to $5,000. 

Are these programs worthwhile? Is it something you can do on your own instead of paying the fees? 

If you are disciplined and make an extra payment each year on a 30-year mortgage, you may shorten the loan term by about five years. If you can make couple of payments every year, that would shorten your loan term by about nine years. So you can pretty much accomplish what these computer programs would do if you can follow the plan – without paying the fees.

But I think the bigger question is whether paying off the mortgage makes sense. Most financial advisors counsel against it because it makes your assets illiquid, that it can create a situation where one cannot access the equity when they most need it. Instead, most experts would advise to keep the cash in safe accounts so that it is available in case of emergencies.

A mortgage provides tax benefits in that the interest portion may be written off on your income taxes (subject to limitations), although that amount is less now with the new tax laws. It is important during the high-income earning years as it is one of the last large deductions you can claim on your taxes. 

Current mortgage rates are still at very low historical levels, so a loan secured by a home offers one of the least expensive vehicles to capital markets. And if you can leverage off these funds by investing it in opportunities that yield more than your mortgage rate, wouldn’t that be a better use of funds?

Lastly, by having a mortgage, it makes the bank your partner. In the event of a major catastrophe, like an earthquake, and your home is destroyed, you may be able to walk away from the loan because, in most cases, the real estate is the sole security for the loan. This is not a position I advocate, but it is a possible scenario.

The decision to pay off or not pay off your loan is a very personal one because a home represents security. Thus I would recommend that you consult with a qualified certified public accountant (CPA) or financial planner to discuss your personal situation and proceed accordingly. 

John M. Lee is a broker at Compass specializing in the Richmond and Sunset districts. For real estate questions, call him at (415) 465-0505 or email johnlee@isellsf.com.

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