Home Equity as The Key to Your Golden Years
written by Credit-HQ ExpertAs we mentioned before, nobody signs a 30 year mortgage without at least dreaming of the day it is paid off. If all works out right, the final payments on that mortgage will happen around the year you retire and begin your peaceful golden years. With the biggest expense on your budget, your mortgage, going away, it is a lot easier for senior citizens to create a budget they can live on using social security and retirement savings.
The problem is if you do the math that retirement will get here before you pay off the mortgage. If you start now paying extra on the principle, it really doesn’t take that much extra each month to “advance” the mortgage significantly. By knocking 10-20 thousand off of the principle part of the loan over the life of the mortgage, you can see that mortgage come to an end years before the 30 year term and then you can realize that dream of a mortgage free retirement lifestyle. All it takes is a little planning and some fiscal discipline to keep adding that little extra each month to your house payment.
Look at your program of paying down your mortgage with the same seriousness you would your 401K at work. If you start when you are young on your 401K, you can accumulate a huge retirement savings to use when you turn 65. Similarly, by starting in the first year of paying on that 30 year mortgage making those extra principle payments, by the time you get to year 20 or 25, that principle will have shrunk in an amazing way.
Some couples really bear down on those extra payments in the years between when they buy the house and the arrival of children. Since children are a big expense, if you can put a good sized dent in that principle on your home loan, then if you have to drop back a bit to pay for braces and private school, you are still on track to pay your home off in time to retire. Then when the kids are out of college and paying their own bills, you can then resume your aggressive principle payments to polish that loan off so you own your home free and clear.
You can do the math yourself. If you buy your home when you are 40 and it’s a 30 year loan, you need to carve about 10 years off of that loan. Your mortgage company will give you a publication they can make up for you that shows how much of each house payment you make is principle and how much is interest and other fees like insurance and escrow for taxes. At first, your payments may only apply a few dollars to the principle. But as the years go by, the amount going to interest goes down and the amount to principle goes up.
An easy way to plan for how much to pay on your principle each month is to not try to work that complicated math that your mortgage company did to create that payment schedule. Instead, if you need to cut 10 years off of your 30 year loan, you need to pay one third of the principle in 20 years of payments. On a $90,000 home loan, you have to pay $30,000 by adding additional principle to each month’s house payment. That seems like a lot of money. But in reality, by just adding $125 each month to your house payment, you can pay off that $30,000 in just 20 years. That is real equity that you get to keep so that is just as good as a retirement investment program with a any bank.
There are other steps you can take to increase the level of ownership you have in your home. If you refinance your home, by dropping the interest rate, more of your payment goes to principle. You can even set up a shorter mortgage, perhaps 15 or 20 years instead of 30 years. The payment will be higher but that mortgage will retire about the time you do. And that is the whole idea.
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.