Ask The Money Coach

Posts Tagged ‘will’

Q: Is it a Good Idea to Pay Extra on My Mortgage for an Early Payoff? How Much Do You Advise to Put Every Month to Pay a $300,000 Mortgage Down in 10 Years?

A: 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: http://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.

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When it comes to setting financial priorities for 2010, it’s all about planning and crossing some major “to do’s” off your list as early as possible …. this way you start off the New Year on the right foot and you score some big financial victories early on … to keep you motivated and on track all year long…

Here’s what to do and how to do it …

a. File your taxes early.

Not many people actually enjoy the process of filling out their taxes every year. But it’s the law, and most of us do have to file a federal income tax return annually. Why stress yourself out (and your accountant) waiting until the very last minute to get this task done? Instead, set a goal date well before April 15 to submit your tax returns to the IRS.

Tip/Resource: If you made $49,000 or less in 2009, you can get free tax help and preparation by an IRS-trained and certified volunteer through the VITA program. That stands for Volunteer Income Tax Assistance. Call the IRS at 800-829-1040 or log onto the the IRS website at www.irs.gov to find a local VITA site in your area.

The Payoff: Getting this chore accomplished early will give you peace of mind, help you avoid crowds at the Post Office, and also get a check back early from Uncle Sam if you’re due a refund. Owe the government? Filing early – or at least on time – will help you too as you’ll avoid late fees and penalties.

b. Get financial help where needed.

There’s no shame in asking for help when necessary, especially in a tough economy. Think about the economic problem areas in your own life, or the aspects of your finances where you struggle financially, and reach out to a reputable, qualified professional who can guide you in those areas.

Tip/Resource: Don’t believe the misconception that hiring a financial pro is “too expensive.” You can hire a fee-only financial advisor for a one-hour consultation, for as little as $50 to $100 via the National Association of Personal Financial Advisors. Just log onto http://www.napfa.org to find a good financial planner in your city.

The Payoff: Getting financial help can put you back on the right track. It also means you’ll no longer bear the burden of fixing your economic problems all by yourself.

c. Draw up a will.

About 70% of Americans don’t have a will, and that’s a huge financial mistake. Besides creating a budget, few things in the world of personal finances evoke so much procrastination as making a will. But having this essential estate-planning document is a cornerstone of good financial planning.

Tip/Resource: Can’t afford to hire a lawyer to create a will? Then make one inexpensively using a professional online service, such as Legalzoom.com ($69) or BuildaWill.com ($19.95).

The Payoff: Creating a will allows you to scratch off a major “to do” item on your financial planning checklist. It will also be a low-cost way to help safeguard your family in the event of your death.

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