When Should You Begin to Aggressively Pay Down Your Mortgage?

Before you go cutting a check to the bank, there is a pecking order of financial priorities you need to address before you consider tackling your mortgage.

Mar 9, 2014 at 12:00PM

The clear advantages of paying off your mortgage as quickly as possible have changed quite a bit over the past few years. The urgency to pay it off has somewhat diminished, as interest rates have plummeted to historical lows. It's no longer the black and white decision it was back when interest rates hovered between 6% and 9%, and even the 11% to 13% we saw a couple of decades ago.

I am a big proponent of paying down that ugly mortgage beast as soon as is practical. But, before you go cutting a check to the bank, there is a pecking order of financial priorities you need to address before you consider tackling your mortgage.

In order of importance, here are the places you need to put your financial attention first:

  • Take The Cards Off The Table: Pay off all credit cards with high interest rates. Consider the huge discrepancy between credit cards with interest rates of 13% – 23%, and a 4% mortgage interest rate.
  • In Case Of Emergency: You need to build an emergency fund, ideally 8-12 months of living expenses. Yes, today's job market is improving, but if you suddenly find yourself facing a layoff, you need to be prepared to sustain up to one year of living expenses.
  • Build Up For Retirement: Are you able to make the maximum yearly contributions to your retirement accounts, 401K, IRA or an equivalent?  Ask your accountant what the maximum allowable is for you and go for it!
  • Get The Kids To School: Ah yes, the kids and college funds.  Depending on how many children you have, how old they are, and what type of college enrollment expectation they have, you need to be making adequate contributions to those 529 plans or other college savings accounts.
  • You May Live A Long Time: My mom is 97 this year, and my aunt just turned 100.  So I am keenly aware that my money could run out before my health runs down.  Another priority investment you need to be making each year is toward long-term health care insurance. It is not as costly when you start it in your 30's or 40's.  But, if you didn't get around to it till your 50's, it will take a hit out of your budget each month.

Once you have paid out and paid off all of the above...you are ready to begin to slay the mortgage dragon with the remaining funds you have available.

Next consideration is age.  I believe that you should make efforts to pay off that mortgage by the time you plan to retire.  There is something very freeing about the release of that last mortgage payment when you switch to a fixed income.  Plus, chances are you will not need the mortgage interest deduction.

One important note that many people don't realize is that when you are into years 20 through 30 of your mortgage payment, you are paying very little actual interest compared to what you paid in the early years.  The banks have very cunningly structured mortgages so that they get a large portion of their money early on via interest sooner than later over the 30 years.

But How Fast & How Much Should I Pay Down?

I always suggest making that decision by counting backwards. If you want to retire and be mortgage free by age 65, then calculate how much extra you will have to pay monthly or yearly to pay it off by that date.  There are numerous calculators online that will help you do this – Bankrate has a great one you can access here.

Here's an example:  You bought your home at age 45 with a 30 year loan at 5%.  You are now 55 years old and you still owe $300,000 but plan to retire at 65. You are going to need to up your current payment of approximately $1,650 a month to approximately $2,650 a month till age 65. Not only will you get your mortgage paid off ten years sooner, you will have saved almost $78,000 in interest!

This article originally appeared Trulia.com

Put those savings to work
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Michael Corbett is Trulia's real estate and lifestyle expert. He hosts NBC's EXTRA's Mansions and Millionaires. In additional to his regular segments on ABC's The View and Fox News, he is a national best selling author with three critically acclaimed real estate books: Find It, Fix It, FLIP IT!; Ready, Set, SOLD! and Before You BUY!

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information