Why Paying Down Your Mortgage is More Important Than Ever

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It’s easy enough to see this work in a “cash out refinance”, where you borrow out additional funds to pay for something unrelated to the home. But it’s also common in refinances where cash isn’t taken out.

In no cash-out refinances, the new loan balance typically increases by adding closing costs to the loan, or by taking out just “a little bit of cash”—maybe “only” a thousand or two. If you’ve refinanced your home in this manner, say three times in the past ten years, you’ve unknowingly added many thousands of dollars in debt to the original loan balance.

Another casualty of refinancing is recasting of the loan term. If you purchased your home with a 30 year loan, refinanced five years into the loan and recast the loan at 30 years, you’ve effectively created a 35 loan! If you’ve refinanced and recast back to the original term several times, you could be looking at a 45 or 50 year effective term.

Since loan amortization is greater as the loan matures, each time you recast, you’re slowing the pay down process.

If you do refinance, pay your closing costs outside closing or do a no-closing cost loan where the closing costs are paid by the lender in exchange for a higher interest rate. Refuse to take cash out—even a little—and always recast the new loan term to match the remaining term of the existing mortgage.

 
If you recognize and accept that home prices can go down as well as up, your whole attitude toward carrying debt on it should change. Be purposeful about paying your mortgage down ahead of potential future price declines. Increasingly, this isn’t just a retirement strategy, but a survival skill!

( Photo courtesy of Mike Licht )

Article courtesy of Kevin Mercadante with OutOfYourRut.com