Can You Afford Your Mortgage?
Equis Financial has teamed up with Foresters Financial to create life insurance policies that can guarantee you will be able to afford your mortgage after the loss of an income stream.
If you want to reduce the overall interest you pay on your mortgage or free up cash for other uses, paying off your mortgage early can help. Every month you have a mortgage, you pay interest on the total balance left. By paying that balance off early, you eliminate years of added interest payments charged for the loan. Depending on how much is left on your mortgage, this could equate to thousands of dollars in savings.
Paying off your mortgage in full also frees up cash flow each month. This reduces financial strain on your household and gives you more resources to invest or save—a move that could net you higher returns in the long run. Having your mortgage paid off can also help in retirement, lowering your monthly household costs and stretching your retirement dollars further.
You don’t even have to pay off your mortgage in full to enjoy benefits. Paying a large lump sum toward your loan balance lowers your overall interest costs and helps build equity. Once you have 20% equity in the property—meaning you have paid off 20% of the total loan—you can cancel your private mortgage insurance (PMI) and lower your monthly costs even further. PMI can cost homeowners between 0.5% and 5% of their original loan balance.
If you've paid off a significant amount of your loan, you have the option of leveraging that equity to secure a home equity line of credit or cash-out refinance. These mortgage options essentially convert your equity into cash, which can then be used for renovation costs, emergencies or even tuition expenses. Although cashing out equity will increase your loan expenses and add another lien on your property, it can be a useful source of emergency funding that's far cheaper than an unsecured personal loan.
On the other hand, if you’re thinking of using cash reserves or savings to pay off your loan, you should understand that this may increase your risks and may not be the most prudent use of your cash. While paying off your mortgage loan early is usually a good idea, there are situations where it may not be best use of your free cash flow. Though you would still have your home equity to tap into, selling your home and accessing those funds may prove difficult. Your ability to do so will depend on other factors, including the local market, interest rates and supply and demand. These factors are hard to predict and could change by the time you need to sell. Therefore, it’s important to maintain a minimum level of cash to meet emergency expenses.
There are also market concerns to consider. Inflation actually devalues any cash you hold uninvested. Assuming inflation continues to rise, the purchasing power of every dollar you hold in cash erodes over time. However, by making all your payments at once, rather than hoarding it in cash savings, your money—and the house you put it toward owning—could be better protected from inflation and changing market conditions. While this may vary based on your unique real estate market, home values generally appreciate at a rate faster than inflation.
You should also consider potential investment opportunities you may lose out on by paying off your loan early. Every time you make a mortgage payment, you're essentially making a risk-free investment by reducing your risk load and investing at your mortgage's interest rate. By comparison, investing your money into stocks and interest-bearing accounts offers the chance to earn returns beyond your mortgage risk-free rate. Every dollar you put toward your mortgage is a dollar you can’t invest in these higher-yield ventures.
For reference, the average return on the S&P 500 stock market index was just over 9% over the past 90 years, while the average rate on a 30-year conventional mortgage is just over 4.5% as of the date of this writing. While this doesn’t mean you should invest all your money in stocks instead of your mortgage payments. This is another thing to consider if you have extra cash to invest, and can be especially important if you weigh the advantages of investing your funds in a tax-advantaged 40(k) account, as described in the segment below.
Keep in mind that some lenders may also charge a prepayment fee for borrowers who pay off their loans early. Make sure you’re aware of your lender’s prepayment policies and factor those into your savings/loss calculations.
To learn more about how Equis Financial or Schwartz Agency can help you manage your mortgage or other financial situations, please visit Equisfinancial.com or Schwartzagency.com to speak with an agent!