How Long Should You Be Paying Off Your House?

image (21)

My dad took out a twenty year VA mortgage in 1966 at age 49.  He died two years before it would have been paid off.  At the time, it didn’t make sense to pay off his mortgage early, because it was locked in at a low interest rate, and rates of return were higher in other investments, include a regular savings account.  This presumes that he invested the money, rather than spending it.

A year after we were married at ages 30 and 32, my wife and I bought our first house in 1991 with a 30 year FHA loan with 10% interest.  After two years, we refinanced, with no closing costs, to a 15 year 8% mortgage.  We made higher payments to target paying it off in thirteen years.  We paid that mortgage off in nine years with a home equity line of credit, that was at a 4% variable rate at the time.  I didn’t like the idea of a variable rate of interest, but it was such a low rate, and we planned to pay it off in four years.  We paid it off a year early using cash which we freed up by putting expenses on a 0% credit card that we paid off in a year, before the rate rose.  We finished paying off our house in a total of fifteen years, at ages 46 and 48.

My situation was different than my father’s, because I was paying a higher interest rate on my house than I could get in a guaranteed rate of return elsewhere, at least when we had the two mortgages.  When we took out the HELOC, I couldn’t get a higher rate of return guaranteed, but I could have made more in the stock market.  At that point, I just wanted our house to be paid off in fifteen years to free up money for putting into retirement and paying for college.  In retrospect, I would have been better off to have put money into my retirement earlier, rather than paying off the HELOC early.  I could have stretched the HELOC to its maximum of ten years, and put what I was making in accelerated payments into my retirement, which was in stock and bond mutual funds.  That means, we would have paid our house off in 21 years, rather than 15.  If we had done that, we wouldn’t have been able save for the year we would have two kids in college.

I found that it feels good to have the house paid off.  It freed up money to put into retirement funds and to pay for our kid’s college education.

Thirty percent of Americans 65 and older have mortgages, with a median balance of $79,000.  This makes it difficult to retire.

The easy way to avoid this problem is to not take out a mortgage that extends to a period in which you plan to retire.  I would suggest that a good rule of thumb for almost anyone is to not take more than 30 years to have your house paid for, from the time you take out your first mortgage.  That means that if you move, you need to shorten the term of the mortgage, or make accelerated payments. This is difficult because of the real estate agent fees, closing costs, and moving costs.  This creates a strong case for not moving, unless you have to.  If you relocate for a job that has a higher salary, you can use your increase in pay to make accelerated payments to catch up on your mortgage.

If you get divorced and you lose half the equity of your house, you could downsize to stay on track for having a house paid off in thirty years.

The average age of marriage is now 29 for men and 27 for women.  If a couple waits a year to buy a house (FHA loans only requires 3% down), they would have the mortgage paid off when they are 60 and 58.   If they are paid bi-weekly, they get two extra paychecks a year which would bring the term of the mortgage down to 22 years, if the checks are applied to mortgage principal.

Digiprove sealCopyright secured by Digiprove © 2015

Leave a Reply

Your email address will not be published. Required fields are marked *