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Faster mortgage paydown?
Question: Hi! We have a 30 year fixed mortgage at 5.625% interest rate. We have $342,300 left to pay on the loan and currently pay $2,776 per month. We received an offer from our large mortgage lender to join their "equity accelerator" program, essentially contributing one extra mortgage payment a year. I'm seeing it as a way to free up cash flow for our bill juggling every month, instead of one whole paycheck devoted solely to the mortgage, I can divide up expenditures a little so we aren't so strapped until the next pay date after paying the mortgage. The fee is $49/one time fee and $9/month. In addition, this will probably be our retirement home as it is lakeshore in a large metro area. We have been surviving on one income for nine years while my daughter was young and then diagnosed with leukemia and now that she is well, I'll return work next September. What do you think of these programs? Thanks so much. Stephanie, Mound, MN.
Answer: I'm happy to hear that your daughter is doing better.
Now, on to the finance question: I'm not a big fan of these kinds of programs as a general rule. One reason is that you can do it on your own without paying the upfront and monthly fee. Just send in an additional check on your own with a note that the exra payment is to go toward principal only. By the way, money will get tighter if you're sending more of your cash flow toward your mortgage.
However, a listener once pointed out that while I was right, she participated in one of these plans because she was a single Mom and her life was incredibly busy. Despite her best intentions she always forgot to send in the check. The automatic program worked for her.
On a more fundamental level, as I've noted many times before, I'm wary of people taking their discretionary money and sinking it into their home. I'd prefer the money go toward building up an emergency savings fund, as well as a well-diversified portfolio of stocks, bonds, international equities, Treasury Inflation Protected Securities (TIPS) and the like. Of course, accelerate your mortgage payments once your home is a smaller share of your overall portfolio.
About the author
Christopher Farrell is economics editor of Marketplace Money, a nationally syndicated one-hour weekly personal finance show produced by American Public Media.
One thing I always thought was a wise thing to do is get your house paid off before you retire. So if you are 53 (in my case) and you buy a new home, go for a 15 year mortgage so your home is paid in full when you retire at 68. If you get a 20-year mortgage, under the same scenario, you should consider paying some extra, especially in the early years, so that you take 5 years off the term.
I'd encourage Stephanie to save that extra money to build a little financial cushion first, so they have a little more money for everyday expenditures during the pay period when the mortgage is paid. It sounds like that should be a "nest egg" of half the mortgage payment. They could consider it part of their family's emergency savings.
