How your mortgage can impact your financial plan

It’s likely your mortgage payment may be the largest essential recurring expense in your financial house.  It can be surpassed temporarily by childcare expenses with a young family.  The good news is that kids grow up and childcare expenses will eventually evaporate over time.  Your mortgage choices have an impact on your financial and life planning goals.  Below, I will discuss ways you can set yourself up for success.

Should you explore a refinance?

Mortgage interest rates have fallen significantly in the past month or so.  This is a good time to review what you are paying AND the years remaining on your loan.  Be aware that you are resetting the clock when selecting a lower rate.  This makes sense if you lower your interest costs, have many years left on your mortgage, and aren’t planning on moving anytime soon.  It’s likely not such a good idea if you are five to eight years from being mortgage free, as “resetting the clock” may stretch out the number of years you must repay.

Refinancing may lower your monthly payment, but there are other implications.

Mortgage interest is deductible on your tax return, up to stated limits.  Refinancing may lower the rate you pay but you are also lowering the interest that you may deduct on your tax return.  Fewer deductions may mean more taxes to be paid.  It’s best to check this out in advance to avoid being surprised when tax time comes.

As part of our planning process we encourage families and professionals to consider their personal cash flow and how it supports their financial and life priorities.  It’s a personal decision to pay more towards the mortgage each month or apply a portion of your annual bonus to lowering this debt faster than scheduled.  We may recall the advice our adult parents provided when they said to “pay off the mortgage before retirement.”  This was good advice years ago and it holds a lot of value today when integrated as part of your financial plan.  Unfortunately, cash flow being what it is, just applying more to something doesn’t necessarily ensure you accomplish what you want.  Life is messy and comes with a lot of competing priorities.  It’s critical to consider your planning needs and timeframe before allocating more to your mortgage payment.  Shrinking housing debt is great but not at the expense of cutting yourself short on emergency cash for life’s little surprises.  Consider this checklist:

• How is my overall cash flow (and reserve) impacted when I begin paying more each month towards my mortgage? Something’s got to give, so where’s the money coming from and am I ok with that?
• Am I able to invest beyond my retirement plan contributions and pay more towards the mortgage? Do I have other investment strategies?  It would be nice not to carry a mortgage but not at the cost of fewer assets to generate retirement income when necessary.
• Given recent market volatility, should I be paying down mortgage debt with low interest costs or should I be redirecting these monies to my after-tax investment account? How does the job description of this account and timing support my plan?
• In the future, life will get back to normal, we’ll want to travel, and have fun with friends and family. Are we setting money aside now for these activities?

The day may arrive when you decide to repurpose your time, sell your house, and move to some other geographical location.  Purchasing a home, in an area where housing costs are less, may stretch the equity you’ve accumulated in your current home.  The ability to leverage a larger down payment on your next home, or simply pay cash, may become possible through integrating your mortgage payments into your financial plan starting today.  Having little to no mortgage payments will lower your housing costs and give you the ability to stretch your other financial resources and investments further.

 

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