Early repayment, refinancing and debt management: Learn what works for you

Some things never change. The sun always rises. Politicians are always untrustworthy. A fast-food cheeseburger is a fast-food cheeseburger. On the long list of permanent fixtures in the modern American lifestyle, one necessary evil stands out as perhaps the most universal and unavoidable, and that’s the mortgage.

Generally, people are thrilled to sign on the dotted line and get the key to their new home, but after a while, a mortgage can start to feel oppressive. With interest rates on new loans at a historic low, many homeowners are looking into refinancing their home, while others are simply debating the merits of paying off their mortgage early.  Both options – like most choices in life – come with ups and downs.

Early repayment

Over the life of your loan, the amount you pay in interest results in a higher overall price tag for your home. That’s why some people look at early repayment as a way to save money in the long run. But consider this: If long-term returns are what matter most to you, you may be better off investing your money in stocks, rather than making higher or more frequent payments on your mortgage.

If you’re thinking about paying off your mortgage early, calculate whether extra payments would affect your bottom line. Remember that the federal government allows you to deduct mortgage interest from your income, so if you pay off your mortgage early, you’ll no longer enjoy that perk.

Refinancing

Refinancing may be one way to shorter the length of your mortgage obligation, but it’s not for everyone. If you’re approaching retirement and want to reduce your expenses, it might make sense to refinance that 30-year home loan with a 15-year loan – but you’ll have to manage higher monthly payments. You may pay as little as $200 extra a month for a shorter loan, but in uncertain economic times, it can be difficult to predict whether that extra expense is sustainable.

Paying off other debts

Don’t focus so intently on your mortgage that you neglect to think about your other obligations. If you have student loan, credit card or auto loan debt, you should repay those obligations before your mortgage. Why? Most credit cards and car loans carry higher interest rates than home loans. And student loan debt is one of the few obligations that will follow you to your grave – even if you declare bankruptcy, you’ll still have to repay it. So if you’ve got the extra money to consider paying more on your mortgage, the better choice would be paying more toward your student loans.

While the idea of living mortgage-free may be appealing, think carefully about where your money will create the greatest returns for you. And consider hiring a financial planner to help you figure out your long-range plans. Many other factors – your child’s college fund, your 401(k) investments, your dreams for retirement – will need to be considered to come up with the best approach for you.