Dear Debt Adviser,
I have asked several people this question, and I hope you can give me an answer. I owe $70,000 on my mortgage with an interest rate of 5.75 percent fixed, and I owe 11 more years. I want to shorten the time of repayment due to retirement in nine years. If I pay $700 a month, how much do I need to pay toward the principal, and how often, to pay off the mortgage in nine years?
I am very encouraged that you are seriously planning financially for retirement. You are a wise woman. Let's get the math portion of my answer out of the way first, and then I'd like to suggest some other things to consider when making the most of your retirement.
Using the mortgage amortization calculator at Bankrate.com, I determined that you would need to pay an additional $120 per month, or $820 a month in total, to pay off the $70,000 balance on your mortgage loan in nine years. Before you start making the additional payment amount, check with your lender to make sure your loan terms allow you to make larger principal payments and that you will not be penalized for an early payoff. Also, find out exactly how to make out the checks so they go 100 percent toward paying off the principal. Failing to communicate with your lender so it's aware of your wishes may result in your additional payment amount being misapplied as principal and interest, not principal alone. Seems like a no-brainer, but it never hurts to clarify.
Now on to my unsolicited, but nonetheless important, advice as you prepare for retirement. Many folks retire from working without looking ahead to their needs for the unforeseeable future. Americans are living longer than ever and without proper planning, their finances could expire before they do. From your question, it seems you have to put pencil to paper and determine the income you have in retirement, and what changes you will need to make in your monthly expense to make that work.
A wealth of useful information on preparing financially for retirement is available on Bankrate.com if you want to double-check your figures.
I'd like you to consider the following as you move forward with your retirement planning:
- If you itemize deductions on your taxes, your mortgage interest is deductible thereby effectively lowering your borrowing interest rate to a percentage that may be below what you could earn by keeping the mortgage and investing the extra principle payments in an IRA. You can learn more about IRAs on Bankrate, too.
- Don't forget inflation. When you are forecasting the amount of money you will need to have saved for retirement, make sure you use planning tools that allow for inflation.
- Include medical expenses and insurance in your financial plan. The upside is we are living longer. The downside is that leads to a natural increase in medical costs as we age. You will want to include the cost of good medical insurance in your planning, which may include a long-term care policy.
- Remember that time may be money. Should your calculations not turn out as you had hoped, and you don't have enough money saved to retire when you had hoped, you have several courses of action available. Save more, save longer. Or look into a reverse mortgage or reduce your retirement budget.
Read more Debt Adviser columns and more stories about debt management. Also, read more about mortgages, home equity and mortgage modification.