Paying Off Your Boston Mortgage Early

Paying off your Boston mortgage may not be the smartest move you could make with your money.Paying off your Boston mortgage early may not actually be a smart idea, especially if your mortgage rate is low, or free, when you factor in inflation and tax deductibility. Making a larger payment is considered foolish if you’re not saving for emergencies or retirement first.

Savvy homeowners have long added extra money to their monthly mortgage to save interest, but it’s not necessarily the smart thing to do in this world of record-low interest rates.

Most lenders will allow borrowers to make extra payments towards their principal whenever they’d like, thereby taking months or years off a loan’s repayment period. Not to mention the interest you’d save over a 20 or 30 year period.

For example, making an extra payment each year on a $250,000 30-year fixed rate mortgage at today’s average rate of 3.4% will cost you an additional $1,110 a year, but will shorten the length of your Boston mortgage by 44 months. You’ll also save roughly $20,300 in interest by paying the mortgage off in 26 years instead of 30.

Retiring your Boston mortgage early actually has more drawbacks than advantages in today’s low-interest-rate environment.

Experts believe you shouldn’t even think about making extra mortgage payments until you first:

  • pay off all high-interest credit-card balances;
  • build up emergency savings to cover six months of living expenses if you lose your job or suffer some other serious setback;
  • make sufficient annual contributions to 529 plans or other college-savings vehicles to cover your or any dependents’ future educational expenses;
  • make the maximum allowable contribution each year to your and your spouse’s 401(k) and individual retirement accounts. For most married couples, that means putting $17,500 into each spouse’s 401(k) and another $5,000 into each person’s IRA (the maximum the Internal Revenue Service will allow as of 2013). People age 50 or older can also add another $1,000 “catch-up” IRA contribution, and sometimes put an extra $5,500 into 401(k)s.
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Not many people can check off each of those items, but if you lose your job, all that extra money you’ve poured into your house isn’t something you can get your hands on when you need it without going through a refinance, but if you’ve lost your job, you won’t qualify for a refinance.

Experts add that if you have lots of spare cash and are tempted to put that into shaving years off your Boston mortgage, setting aside that same extra principal for retirement money will give you more chance to enjoy compound investment returns.

The longer you save for retirement, the better off you’ll be. Not paying off the mortgage and not having any retirement. Then you may be forced to think about something like a reverse mortgage later on just to provide you the lifestyle you may have been able to have had you saved more instead of paying down that Boston mortgage early.

For more Boston mortgage information and tips, check out our Boston Mortgage Info section under the Boston Real Estate Categories to your right.