Year-end review helps you plan

As we close in on the end of the year, it’s a good time to review the different elements of your finances. A review gives you the opportunity to reward yourself for progress and learn from mistakes, as well as the chance to get started on changes for the upcoming year. Small, systematic changes can be especially rewarding in your personal finances, whether you build up savings over time and or improve your credit score with positive incremental behavior.

Today, we’ll look closely at the option of prepaying your mortgage.

Prepaying your mortgage can save you thousands of dollars in interest and give you full home ownership years ahead of schedule. It can be wonderful to own your home and rid yourself of debt sooner than expected, but there are a few things to consider before taking this step:

Do you have emergency savings? If you don’t have at least three months of emergency savings, use any extra money to build this fund first.

Do you have higher interest debt? If you have credit cards or personal loans, the interest rates on these debts are probably higher than your mortgage interest rate. What’s more, your mortgage interest is deductible if you itemize deductions on your tax return. Focus on paying down higher interest debt first, before you turn to your mortgage.

Are you saving enough for retirement? Earnings in your retirement account compound over time, and the rate of return on your investments may be higher than the effective interest rate for your tax-deductible mortgage interest.

Look first at your current amount of annual retirement saving. Is this on track to get you to the final retirement nest egg that you need? If so, you can choose between using any additional money to build a bigger nest egg, or prepaying your mortgage and saving on interest.

Depending on your choice of investments, you could get more out of your money by squirreling your extra funds away in retirement. But if debt is a heavy psychological burden for you, it may give you more peace of mind to prepay. Run the numbers, think about your attitude toward debt, and make your choice.

Prepaying Your Mortgage

First, call your financial institution or review your mortgage documents to find out if there is a mortgage prepayment penalty. If a penalty exists, find out if it comes with an expiration date.

Next, start playing with some numbers, by using mortgage calculators available online. For instance, Bankrate.com’s Mortage Payment Calculator lets you calculate your savings when you add extra monthly, yearly, or one-time payments to your existing mortgage payments.

Let’s say that you have 20 years and a $150,000 balance remaining on your mortgage, which is fixed at a rate of 6%. By the end of the next 20 years, you will have paid $107,915 in interest, in addition to the principal, according to Bankrate.com

When you add an extra $100 payment each month, you shorten the repayment timetable by 2 years and 11 months, and you save more than $18,000 in interest payments.

To prepay your mortgage, simply add the extra amount that you choose to your monthly mortgage payment, or send an extra mortgage payment at the end of the year to your financial institution.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com

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