Saturday, January 17, 2009

Paying Down Mortgage Faster Can Make Sense -- Sometimes

With the markets so dicey, many people who come into extra cash wonder whether they should avoid stocks and bonds and use the money to pay down their mortgage instead.

Doing so can save you a lot in interest in the long run. But your monthly payments may remain the same until you pay off the entire loan. And if you have an attractive rate -- say, in the 5 percent range for a fixed loan -- there's no need to rush to pay it off.

And there's a big downside to tying up too much money in your house: It can be very difficult to access that cash, especially now that lenders are less generous about setting up home-equity lines of credit.

Before you consider adding money to your mortgage, pay down high-interest debt and build an emergency fund. And make sure that some of your longer-term money is in stocks or stock funds.

That said, there are a couple of cases in which paying down your loan might make sense. For instance, if you have an adjustable-rate mortgage that continues to ratchet up, devoting extra cash to your mortgage could give you enough equity to refinance.

And if you're close to retirement and already have a diversified portfolio or long-term investments, paying off your mortgage can make a big difference in your finances. With no monthly housing payment to worry about, you won't need to withdraw as much from your retirement funds in a down market.

Source: Kiplinger's Personal Finance, Kimberly Lankford (1/11/2009)

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