Payoff or Borrow More?
The answer used to be obvious
Let’s look at your options:
Pay off the home as soon as possible
For many, this is still the emotionally most satisfying solution, whether or not it is the financially most beneficial. Reducing the required outflow of funds on a monthly basis certainly feels good. When the total housing expenses drop by $500, $1000, or even more, facing your monthly budget just seems easier. And just as the mortgage was a forced savings plan, the paid for asset can still provide an underlying security hedge for the future.
The trick is getting access to that asset that is in your home. Once your income drops, it can be difficult to get a mortgage or HELOC (home equity loan.) If there are emergencies, luxuries, or investments that you want to make without selling the home, it may be hard to tap the assets in the home. Or, even if you qualify, interest rates may someday return to normal and you may be paying much more thantoday’s rates around 4%.
By taking this course, you may be reducing the amounts you can use in the later years of your employment or early years of retirement for other investments or fun things, while you double up on payments for the mortgage. Most analysts are generally against drawing from other assets for this purpose, especially pension plans.
Stay the course
Another option is to continue to pay your mortgage off per the contract. This would assume that your financial planning has put you in a position to pay that monthly amount along with other bills, travel, and retirement plans you have made. By taking this course, you hold on to your low interest rate loan, and keep other funds liquid for emergencies, investments, or just plain fun stuff.
Borrow more now
This is not the conservative approach, but it might be the financially most astute idea. Interest rates are crazy low right now. While you still have a good income you could choose to refinance and draw funds from your equity at these super low rates.
These dollars can then be invested into other property, business, or other assets to diversify your holdings and potentially earn far more than 4%. For instance, there are some fairly conservative investments that are paying 7%. If you drew out $100,000 from your home at 4% and invested it at 7%, you would earn $250 a month on the difference. You would also be placing the $100,000 in a more liquid asset, making it easier to access in case of a great opportunity or an emergency.
On the other hand you place that money where you can use it for frivolous ventures, too. Some folks tend to let ready cash burn a hole in their pockets. They may be more likely to use the money for frivolous or risky things when it is easy to do so.
You’ve seen the TV ads and maybe you have considered a reverse mortgage to increase your monthly income during retirement.
When you use a sophisticated mortgage counselor like Bill Rayman, he can help guide you to wise decisions based on your plans and your personal risk characteristics. Call Bill Rayman today to discuss your mortgage needs: 424.354.5325