Q. We have 14 years left and $ 270,000 on our 20 year mortgage. I plan to pay off the loan in about five years, but rather than sending a little more money to the bank each month or year, I prefer to keep working for myself until I have an equal amount. the amount of the current loan. I don’t see the point in letting the bank have access to the money in advance. At the moment, I keep these funds in an online bank earning 0.40%. Is there a better place to keep that money and earn some sort of return without too much risk?
A. Paying off a mortgage early can indeed be a smart strategy to save on the interest you pay on the loan.
But it’s not good for everyone.
“Even though you can get a tax deduction on the interest payment, the amount you lose in tax savings will generally be pale in comparison,” said Claudia Mott, certified financial planner at Epona Financial Solutions in Basking Ridge. “Please make sure you have read your mortgage document regarding the early repayment of the loan in order to familiarize yourself with any restrictions, requirements or penalties that may be included in the contract.”
She said using a mortgage amortization calculator will help you determine exactly how much savings should be available when you’re ready to close the loan.
These tools can be found online and require you to enter information about the loan, including the original amount, the date it was issued, and the interest rate, she said.
“With the goal of making a lump sum payment in five years, the money you save really cannot afford to be put into an investment alternative that involves risk like a mutual fund, a negotiated fund. in stock market (ETFs), stocks or even a bond, ”Mott said. “While five years may not seem like a short term goal, if the stock market corrects itself or interest rates start to rise, the loss of investment capital will derail your plans and you may not be able to. not recover the loss when you are ready to make the prepayment. “
The current low interest rate environment is indeed frustrating when it comes to helping savings dollars earn interest and grow. High-yield savings accounts, most of which are provided through online banks, offer higher rates than can be found locally, Mott said.
Certificates of deposit would be another alternative to consider and again online shopping will generate the most attractive interest rates.
“Creating a CD ladder by buying some of the savings at different maturities will help you capture the slightly higher rates that come with longer durations,” she said. “The benefit of a CD ladder comes at maturity when you can reassess the rate environment and transfer the money into a new contract to take advantage of the going rates.”
As long as the bank you use is FDIC insured, there is no better place right now to keep your money cash and safe, risk free, said Victor Cannillo, founder of Baron Financial Group at Fair Lawn.
“An interest rate of 0.40% is very good in this current environment,” he said.
Before making a decision, Canillo said you should consider the interest rate on your existing mortgage.
“Rates are currently at historically low levels, so one option might be to refinance your mortgage into a new 15-year fixed-rate mortgage, depending on your breakeven point and how long you intend to stay. live in the house, ”he says.
If your mortgage rate is competitive, another option is to not prepay the existing mortgage and put the money into a diversified strategy, he said.
“This allows you to have another compartment of money and access cash in the event of an income interruption,” he said. “Remember, the bank probably won’t lend you money if you need it, if you are unemployed.”
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Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Register for NJMoneyHelp.comof weekly electronic newsletter.