7 Times When It’s Smart Not to Pay Off Your Mortgage Early

Couple in front of home
Monkey Business Images / Shutterstock.com

There are plenty of reasons to pay off your mortgage early — chief among them being the many thousands of dollars in interest you stand to save.

At the same time, there also are benefits to not paying off a home loan ahead of schedule.

Which approach is the better one depends on your financial situation and goals. If one or more of the following situations applies to you, you may benefit from sticking to your mortgage payment schedule and using any extra cash for other purposes.

1. You lack emergency savings

Financial ups and downs are inevitable. The best way to ensure you can cover an unexpected expense or weather a job loss — without having to take on new debt — is to set aside some spare cash as an emergency fund.

“If you don’t have any emergency savings, work on that before paying off your mortgage, as the extra equity doesn’t benefit you like cash does,” says Pamela Horack, a certified financial planner with Pathfinder Planning in Lake Wylie, South Carolina. “If you need new tires on your car, you can only spend cash.”

For help fixing that issue, check out “9 Tips for Starting an Emergency Fund Today.”

2. You want extra liquidity

Paying ahead on your mortgage locks your extra cash in one place. In other words, by using extra cash to pay down your mortgage faster, you effectively convert a liquid asset (cash) into an illiquid asset (home equity).

Once you do that, you have only two choices for getting money out of a home: Sell it or borrow against it.

During the housing bubble a few years ago, Money Talks News founder Stacy Johnson found himself glad he had kept a good chunk of change in the bank. He was able to use it to buy the house next door cheaply and flip it for a big profit.

He explains:

“Theoretically, I could have borrowed against my house to raise the cash, but I probably wouldn’t have. Because I had the cash and it wasn’t earning much, I did something with it that earned a lot. In short, having money in the bank can really be an advantage if you’re planning to use that money.”

3. You can earn a better rate by investing

If you have extra cash to pay off a mortgage with a low interest rate but you know you could earn a higher rate of return by investing that cash, it is best not to pay off your mortgage.

“If you make a higher yield from your investments than your mortgage interest rate, you will likely be much better off in the long haul,” Abel Soares III of Hui Malama Advisors in Honolulu tells Money Talks News.

4. You want lower taxes

If you invest extra cash in a tax-advantaged account such as a 401(k) or individual retirement account (IRA), you have another reason not to funnel the funds into your home loan: lowering your current tax bill.

“Paying off a mortgage early competes with priorities that can help lower taxes, such as funding a 401(k) plan up to the maximum amount,” says Patrick Whalen, a certified financial planner at Whalen Financial Planning in Los Angeles.

A mortgage payment can also lower your taxes because mortgage interest payments are tax-deductible. But due to the significantly higher standard deductible that took effect in 2018 — a result of tax reform — fewer homeowners are likely to benefit from deducting interest.

5. Your mortgage is a hedge against inflation

A mortgage with a fixed interest rate can be a hedge against inflation, Whalen tells Money Talks News. This is because the amount of the mortgage payment is the same every month, but the value of the payment decreases over time due to inflation.

Andy Tilp, a certified financial planner at Trillium Valley Financial Planning in Sherwood, Oregon, explains it this way:

“As all your homeowner costs — such as maintenance, utilities, repairs, property tax, etc. — rise each year with inflation, the mortgage payment stays flat, assuming a 30-year fixed rate. Thus, in 30 years, what seems like a large payment now will seem relatively much smaller.”

6. Your job is uncertain

If you think you will be leaving a job and it may take some time to find another one, hold off on paying ahead on your mortgage. You might need that money to get by until your job situation settles out.

7. You have high-interest debt

If you are also paying off debt that has a higher interest rate than your mortgage — such as credit-card debt or student loans — it is technically better to put any extra funds toward that debt instead of your mortgage.

The debt with the higher interest rate is costlier. The sooner you pay it off, the more money you will save on interest over time.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

4 Benefits of a Certificate of Deposit (CD)

If you’re looking for a secure way to grow your money, a CD could be right for you.

Are you on the hunt for a secure way to grow your money? Although it may not be on your radar, consider the benefits of a Certificate of Deposit (CD). In a nutshell, it is a deposit account with a set term, typically running anywhere from three months to 10 years. But more than that, a CD is designed to increase your savings because regardless of what the market does, money you put into a certificate of deposit grows thanks to its superpower: interest.

There are many benefits of a certificate of deposit

If a certificate of deposit sounds like something that could do wonders for your financial plan, you’ve come to the right place. Here are four benefits of a CD:

1. CDs can be a safe choice

Are you skittish about betting on the stock market or tying up your money in more volatile products such as bonds? A benefit of a certificate of deposit is that it can lay many of those fears to rest. That’s because the FDIC insures CDs up to the maximum allowed by law. Before you open a certificate of deposit, confirm that your financial institution is FDIC insured so if it were to fail, you know your money is protected.

While having the FDIC on your side helps, CDs come with further protections. One of the main benefits of a CD is that unlike stocks, where it’s possible to gain or lose large sums all in one day of trading, money put into a CD will continue to grow predictably.

Andrew Denney, founder and CEO of financial planning firm Prosperity Financial Group, says that a CD can be secure because in some cases, you can “cash out and still get the principal.” However, while your initial deposit can be safe, if you cash out early, you may face an early withdrawal penalty that could eat into your interest. At times, these penalties could also impact your principal. (Skip to CD benefit #4 to learn more.)

CD benefits include locking in your rate and watching your money grow over time

2. CDs can have fixed rates for fixed terms

Financial markets can be volatile and returns for investments in the stock market or real estate, for example, can be unpredictable. Some years are fruitful and others are… less so. But another benefit of a CD is that you can lock in a fixed interest rate for the life of the product. Unlike the sometimes roller coaster fluctuations of the markets, a CD grows dependably courtesy of slow, steady interest.

When you weigh the benefits of a certificate of deposit, there are three interest rate options to consider:

  • A fixed-rate CD has a set interest rate that is paid throughout the life of the CD. A 5-year CD with a 2.00% APY (annual percentage yield) will earn that rate for the entire term, regardless of any interest rate increases or decreases during the time you have the CD.
  • A variable-rate CD typically pays a percentage according to the difference between the interest rates at the beginning and end of your CD’s term. For example, if you opened a 2-year variable-rate CD at 1.05% APY and it grew to 1.15% APY, your return would be calculated based on the increase over that time period.
  • An adjustable-rate CD has a set interest rate at the time of your deposit but comes with the option to “adjust” the rate during the CD’s term (you may only be able to adjust the rate a limited number of times).

Alexander Joyce, president and CEO of ReJoyce Financial, LLC, a retirement income planning firm, says that although they are less liquid, an important CD benefit is the fixed interest. If you opt for a longer-term CD, such as one with a 3-to-5-year term, the interest rate could be higher, Joyce adds. Depending on the financial institution where you open your account, and how long you want to keep your money in a CD, it is possible to find rates advantageous for both short and long terms.

3. CDs come with different maturity dates

Have you dreamed about soon taking the trip of a lifetime, or are you saving for something further out, like higher education for a child just learning the multiplication tables? Among the key CD benefits is that it can provide a safe place to park your funds for a set period that’s aligned with your financial goals.

Randy Becker, a retirement planning professional and owner of Becker Retirement Group, says a benefit of a CD is that it can help you save for large, one-time expenses. If, for example, you plan to take a costly vacation in the future, you can put your funds in a CD that matures right before you leave. “You can match your CD to the timing of life events,” Becker says.

4. CDs may have low or no fees

Another benefit of a certificate of deposit is that it may have a low-to-no fee structure. Some banks don’t charge a monthly fee to hold your money in a CD. This comes in handy, according to Joyce, because you don’t have to worry about fees impacting your CD earnings.

A simple way to reach your goals.

Watch your savings grow with a CD.

Lock in Your Rate

Certificate
of Deposit

Discover Bank, Member FDIC

While the absence of a monthly fee is a key CD benefit, it’s important to remember that there could be other costs associated with a certificate of deposit. One example is the early withdrawal penalty (remember this?). Should you take your money out of the account before its maturity date, the bank may impose a penalty, which could negatively impact your interest or principal.

An early withdrawal penalty and account fees depend on the agreement at the time you open the account, so make sure you read the fine print and have a clear picture of what fees and penalties, if any, apply. Some banks offer no-penalty CDs, so it might be useful to inquire about these, too.

The benefits of a CD include guaranteed growth and security

Making wise financial decisions

While CDs currently offer a leaner interest rate compared to robust rates of cycles past, don’t be discouraged. The benefits of a certificate of deposit are many, including safety, low-to-no fees and, in some cases, flexible maturity dates. These CD benefits can provide invaluable peace of mind when it comes to your money. And, Joyce says, sometimes the potential gains in an uncertain market don’t outweigh the need for a financial product like a CD that provides reliable growth.

“Feel secure about that,” he says.

Source: discover.com

13 Ways to Get Out of Debt

Stressed businessman looking at laptop
GaudiLab / Shutterstock.com

This story originally appeared on NewRetirement.

In 2020, Fidelity reported that the majority of people who were making financial resolutions for the new year wanted to achieve a debt-free life. While fortunes have shifted during the coronavirus pandemic, it is still a very worthy goal.

Not sure how to get out of debt? You have options.

Don’t play tug of war with your money. Get out of debt and align your finances on your side!

Based on my experience, there are quite a few methods for getting out of debt. Some require brute force, others discipline and there are even methods that are fairly passive and pain-free.

Find the right way for you to get out of debt.

1. The Debt Snowball

Studio Peace / Shutterstock.com

Endorsed by Dave Ramsey and many other personal finance gurus, this works.

What is it? It is a debt snowball!

Start with your smallest debt and pay it off as quickly as possible, all while making the minimum payments on all the other debts.

When your first debt is gone, apply that usual payment amount to the payments you make on your next-largest debt. Follow this pattern until you’ve officially slain the dragon and all debts are paid.

Why is this my favorite? Because people stick with it.

When you pay off a debt and strike it off your list, something inside you just goes berserk with enthusiasm. You want to do it again! “What’s the next debt? Let’s kill that one too!” And you just go absolutely nuts until all the debts are completely gone.

2. The Debt Avalanche

Man with sledgehammer hitting "Debt" ball
BsWei / Shutterstock.com

What does the debt avalanche do that the debt snowball doesn’t?

It considers the interest on your loans.

The debt avalanche applies a different methodology for how to get out of debt.

Instead of ordering your smallest debts to your largest, you pay them off from the largest interest rate to the smallest. Maggie McGrath did some great analysis on Forbes if you’re interested in the math and want to get your nerd on, but apples to apples, the avalanche does pay off debts faster than the debt snowball.

However, fewer people make it through this plan because you don’t get to see immediate wins to keep you motivated.

If your highest interest loan is your $20,000 maxed-out credit card, it might take you a full year to pay it off. By that point, most people have lost motivation and moved onto the next shiny object of life.

If you’re super nerdy and determined to get rid of your debt, however, the avalanche will probably work for you. If you need the small wins to pep you up and put that spring in your step, use the debt snowball.

3. Loan Consolidation

Couple meeting with loan officer
megaflopp / Shutterstock.com

If you have a few debts that have a high interest rate, and if you’re more passive about getting rid of them, then setting up a simple loan consolidation might be your best bet.

Set up the term length, negotiate the new, lower interest rate, and you’ll get rid of your debts at a pre-determined time — hopefully long before your retirement date. It’s not the most effective way to pay off your debts, but it is better than ignoring your debts entirely.

4. Transfer Balance to a Low- or Zero-Interest Credit Card

couple earning cash back while shopping online
Prostock-studio / Shutterstock.com

Depending on your credit score and debt burden, you may be able to transfer your debts onto a zero-interest credit card and really focus on paying down the balance as quickly as possible — preferably before that introductory interest rate resets to a higher one.

This is great if you are committed to truly getting rid of the debt.

5. Talk to Your Creditors About a Lower Interest Rate

A woman with a smartphone and credit card is taken by surprise
garetsworkshop / Shutterstock.com

Particularly with credit card debt, you may be able to talk with your creditors and ask them for an interest rate deduction.

The worst they can say is no. And, it doesn’t hurt to ask.

6. Try Negotiating a Settlement

Two pair of clasped hands on a conference table.
vchal / Shutterstock.com

Your creditors want you to succeed. They make money when you are able to pay back the loan.

If they think that you won’t be able to pay back the money you owe them or if they think they can get their money back faster, then they may be willing to make it easier for you.

Before negotiating, make sure you know exactly how much you can pay back and in what time frame. Be prepared to demonstrate to the creditor how exactly you are going to be successful. Prepare a compelling argument for why they should reduce the total amount of what you owe.

7. Refinance Your Mortgage

buying a home
ShutterOK / Shutterstock.com

Interest rates are near an all-time low right now.

If you have a mortgage, it may be incredibly profitable for you to refinance into a lower interest rate.

Just be sure to consider closing costs.

8. Refinance Your Home and Consolidate Other Loans Into Your Mortgage

Coins and Monopoly hotels and houses
igorstevanovic / Shutterstock.com

If you have a mortgage and additional debts, you can really take advantage of low interest rates by refinancing your mortgage and securing a home equity line of credit (HELOC) at the same time.

The refinancing can lower the interest rate on your mortgage. Assuming the HELOC is at a lower rate than your other debt, you can your HELOC funds to pay off other higher interest loans.

9. Ramp Up Your Earnings

Winking woman with money
Alliance Images / Shutterstock.com

Being in debt can be a great motivator to find ways to earn more money.

The extra cash from a side gig or a raise can help you pay off your debt. And, bonus, when you no longer have those payments, it will be easier for you to save for retirement!

10. Cut Existing Expenses

Woman with piggy bank
Jason Stitt / Shutterstock.com

If ramping up your earnings does not seem to be an option, but you really want to accelerate your debt payments, you should consider cutting existing expenses and using those savings toward your debt.

It is not exciting or tricky, just the old-fashioned, tried-but-true method of eliminating debt.

11. Commit to Getting Out of Debt

Woman looking in the mirror while trying on new clothes
immfocus studio / Shutterstock.com

How do you get out of debt? You simply commit to getting out of debt! As your mom might have told you: Where there is a will, there is a way.

12. Stop Saving and Pay Off the Debt

Senior man gesturing stop to protect his money
Krakenimages.com / Shutterstock.com

Yes, you need to be saving money. You definitely need to save and invest those savings.

However, it may be a better short-term financial decision to stop saving and use the funds that you would otherwise be socking away to pay off your debt.

This is a good strategy if you have debt with high interest rates.

You may want to compare the interest rate on your debt with the rate of return you could earn on savings for a quick assessment of where to put your money. Put your finances toward the higher rate.

13. Run Scenarios and Compare!

Man using too much data on his phone, tablet and laptop
Bacho / Shutterstock.com

Not sure paying off your debt will really make a big difference to your financial life? Try it out.

The NewRetirement Retirement Planner is a really detailed and powerful DIY financial planning tool.

After configuring the system with your personalized profile, you can try different scenarios. See what happens if you:

  • Use the debt snowball or debt avalanche techniques.
  • Pay off all your credit cards in the next year or two.
  • Pay off your mortgage before retirement.
  • Downsize and eliminate your existing mortgage.
  • Consolidate all debts into a lower interest rate.

Once you see how accelerating your debt payoff can impact your finances (now and into the future), you may have the motivation you need to get rid of debt.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com