Rough Economic Times? Prepay Your Mortgage

by Dual Income No Kids on December 8, 2008 · 0 comments

If you’ve been watching the headlines you know the economy in trouble. In this environment your options for building net worth are often unappealing. You could sock away your cash into a savings account – but with money markets yielding 2.7% and inflation at over 3.1% you’re losing some of your cash due to inflation. You could also invest in the stock market. That’s brave, last week the DOW lost 680 points.

One great way to build your net worth is to pay off your mortgage early. There are a number of reasons to do this:

1) Its a Guaranteed Return: When you pay off your debt, you’re effective earning a return equivalent to the interest you pay on that debt. For example, if your mortgage interest rate is 8%, every dollar you pay yields a $1.08 in return. Similarly, if you have 6% mortgage, you’ll get a $1.06. This is a good return with very little risk.

2) Prepayments Build Equity Quickly: Paying off your debt can help increase your equity. For example, lets say you had a mortgage of $100,000 at 7%. If you made extra payments of $50 dollars per month for one year, you’d save over $4,009.10 in interest over the life of your your note. So, the faster you can build equity, the wealthier you can become.

3) Less Debt Means More Options: You’ve probably realized that job loss is a distinct possibility in this economy. If you are carrying a mortgage, you’ll have to continue paying regardless of whether or not you’re employed. Also, at some point you will have to retire. By retirement you will want your lowest possible expenses. Paying your mortgage early will increase your options both in terms of coping with job loss and safeguarding your golden years.

Of course, if you don’t have an emergency fund or you have a ton of high interest credit card debt, or you aren’t funding your ROTH IRA or 401k, it might not make sense to pay off your mortgage early.

Best,

James

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