Ask The Money Coach

Archive for the ‘Life Insurance’ Category

If you can afford to do it, yes, it is a good idea to pay extra toward your mortgage and pay your house off early. The one caveat I would say, however, is to make sure that you’ve taken care of what I call “the financial basics” first. This means paying off excessive credit card debt, having at least a three month cash cushion set aside for emergencies, creating a will, and protecting yourself with both life and disability insurance. Once those things are taken care of, by all means, start throwing extra money at your monthly house note to own your home free and clear as soon as possible.

Paying Down a $300,000 Mortgage

You asked about paying “down” a $300,000 mortgage, and I assume you meant just that – paying a big chunk of it down, and not paying it completely off. If you acquired your home anywhere from 1 to 10 years ago, and got your standard 30-year mortgage, paying it off in just 10 more years would mean you’d likely have to nearly double your current payments. On the other hand, if you’ve owned the home for some time, and want to accelerate your payments so that you can, indeed, have it paid off entirely in 10 years, then that may be financially doable without such a huge increase in payments. One big variable in all this is also the interest rate on your home loan. Since I don’t know how any others facts outside of the payoff amount – $300,000 – and your desired time frame (10 years), I’ll briefly describe two payment options, and then point you in the right direction for further information, where you can run multiple scenarios based on your exact circumstances.

Mortgage Payments are Always Front-Loaded

According to Bankrate.com, to pay off in 10 years a $300,000, 6% home loan means your monthly payments would need to total $3,331. By comparison, a 30-year mortgage, also for $300,000 at 6%, would have payments of $1,799. But remember, mortgage payments are very front-loaded, so that you pay more in interest charges in the early years, as opposed to paying down the principal on the loan. In fact, after 10 years of paying on a 30-year mortgage, you’re likely to have knocked off just 13% to 17% of your principal balance. It typically takes about 17 to 19 years of paying a mortgage before your payments start being mostly applied to principal instead of interest.

Use Online Mortgage Calculator

Use this mortgage calculator on Bankrate.com: www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx.

It will allow you to play around with different payoff scenarios for your mortgage. By doing so, you’ll see how many tens of thousands of dollars you can save by applying extra payments to your mortgage, and paying it off sooner rather than later.

If it was just a matter of evaluating the wisdom of using your life insurance to pay off your charge card debt, I would be inclined to tell you that it would probably be a smart move. However, there is a big wrinkle in the whole equation: namely, you stated that your job is ending soon. Normally, I would have counseled you to seriously consider paying off the debt quickly while you can – especially since taking a loan from your whole life insurance policy should have no tax consequences to you. However, the bigger issue is your looming unemployment status.

Use Insurance as a Cash Cushion in the Future

If you don’t find another job or a replacement contract, you will have to consider how you will pay all your normal monthly obligations – housing, food, utilities, transportation, and so forth. I assume you have little to no savings (or some of that likely would have paid the debt already). Unfortunately, it is taking people longer than ever to find jobs. And with 10% unemployment, 1 out of 3 job-hunters has joined the ranks of the “long-term unemployed.” This means they have been out of work for at least six months. So given the current economic environment, and the fact that your credit card debt is carrying an extremely low interest rate right now, I would suggest continuing to pay on that debt as aggressively as you can, but don’t yet tap the cash value of your whole life insurance policy. Keep it untouched for now, as a standby cash cushion that you can access in the future if things get especially tight and you can’t easily replace your income.