Dear Kirk: My husband and I can’t afford a 15-year mortgage, but our 30-year mortgage is a looming presence. Do you have any tips for strategically paying off our mortgage early without spreading ourselves too thin?
Kirk Says: I am assuming that your comment about not being able to afford the 15-year mortgage means that there is not enough money in the budget to meet the payments of the 15-year mortgage, but there is sufficient money to meet the 30-year mortgage obligation. So it sounds like there may an extra $100 in the budget—maybe even up to to as much as $600 depending on the loan amount and interest rates. Here are a few strategies that will offer inspiration for ways to close the gap between the 15-year and 30-year mortgage options.
Strategy 1. Reduce your loan amount to the point that it fits in the 15 year mortgage time frame that you want. I don’t want to overlook the obvious here—this is an option.
Strategy 2. Make extra principal payments. An extra $100 in principal payment every month on a $300,000 loan for a 30-year fixed rate mortgage will save a total of $32,705, plus three years and seven months on the life of the loan. But here’s a word of caution, considering the housing market that we have just lived through over the past few years. What happens to the extra principal if the market takes a drastic downturn and you find yourself upside down in a mortgage that you can no longer afford? Keeping this possibility in mind, let’s look at the next two strategies.
Strategy 3. Put money back into an emergency account. With this strategy, you maintain liquidity, use and control of your money. You may also earn a small amount of interest on this money. However, it will most likely be taxable income. It is hard to quantify the value of the liquidity, use and control until you get to a point that you absolutely need it.
Strategy 4. Purchase a permanent life insurance policy on the lives of the mortgagors. As with the previous strategy, you maintain liquidity, use and control of the cash value within the life insurance policy, plus the money inside the policy grows tax-free. The other benefits are the obvious benefits that a life insurance policy provides in the unfortunate event that the mortgagor passes away, providing proceeds that could be used to pay off the mortgage. Furthermore, after 20 years or so, there could be enough cash value to pay off the mortgage early.
Strategy 5. A hybrid of the third and fourth strategies, the fifth strategy is to purchase a term life insurance policy to provide the life insurance benefit and put money back into the emergency account.
Kirk Gwaltney is a Chartered Financial Consultant and a Chartered Life Underwriter in Brentwood, Tenn. Learn more about him at kirkgwaltney.com.