Becoming debt free is as much a part of the American Dream as owning a home but there certainly can be conflicting circumstances that make the decision to pay off your mortgage early unclear. 

The advantages of paying off debt early is increased cash flow, less interest paid and a higher credit score. The disadvantages are lower cash flow available as discretionary funds for meals, entertainment and other things. If the ultimate goal is financial security, is it worth the intermediate sacrifice?

Whether you pay off your mortgage early is a personal decision that may be right for one person and not for another. Consider the following before you get started:

Reasons you should

• Peace of mind knowing that you don’t have a mortgage
• You’ll save interest regardless of how low your mortgage rate is
• Lowering your housing costs before you retire

Reasons you shouldn’t

• You can invest at a higher rate than your mortgage
• You have other debt at a higher rate than your mortgage that needs to be paid off
• You might need the money in the future and want to remain liquid
• You might not qualify for a mortgage currently
• You should pay off other debt with higher interest rates
• Your employer has a matching retirement plan that would benefit you more
• You have more urgent financial needs like emergency fund, life, health and disability insurance
• You expect high inflation and the value of your mortgage debt will decrease

Use this Mortgage Accelerator to determine how quick you can pay off your mortgage.

It has been said that change is the only constant. Most of the financial experts have been expecting interest rates to increase along with home prices. While homes, in most markets, have definitely seen increases over the past five years, the mortgage rates today are actually lower than they were a year ago. 

If the interest rates were to increase by 1% over the next year while homes appreciated at 6% during the same time frame, a $250,000 home would go up by $15,000 and the payment would be $211.53 more each month for as long as the owner had the mortgage. The increased payments alone would amount to $17,769 for the next seven years.

When facing a decision to postpone a purchase for a year, a legitimate question to ask oneself would be: “how will it feel to have to pay more to live in basically the same home a year from now?”

It is easy to understand that if the price of a $250,000 home goes up by 6%, it increases the price by $15,000. A slightly more difficult concept to realize is that if the interest rate were to go up by ½%, it is approximately equal to a 5% increase in price. A 1% increase in mortgage rates would approximately equal a 10% change in price. This means that if a home goes up in price by 6% and the interest rate goes up by 1%, it is equivalent to the price of the home going up by a little more than 16%.

Use the Cost of Waiting to Buy calculator to estimate what it might cost to wait to purchase based on your own estimates of what interest rates and prices will do in the next year.

During campaign season, it is not unusual to hear a candidate criticized because they make a lot of money but pay little in income tax. While it might not seem fair, taxpayers are allowed to arrange their affairs so that they minimize the amount of tax paid.

Salary, wages and commissions, along with interest and dividends are taxed at ordinary income rates which can range from 10% to 39.6%. However, capital gains rates, for property held more than 12 months, are much lower ranging from 0% to 20%. Taxpayers in the 25-35% brackets pay LTCG rates of 15%.

The profit on rental property enjoys the lower long-term capital gains rates as compared to the profit on “flipped” property which is taxed at ordinary income rates.

Investments in rental homes generate income, provide depreciation for tax shelter, have equity build-up due to the amortizing loan, leveraged growth due to the borrowed funds and appreciation. The profits could be considerably higher than alternative investments and the profits taxed at lower rates.

The advantage is available to people who understand the tax laws and choose to arrange their activities so they pay a minimal amount of tax. The advantage is available to all taxpayers, not just the rich. In fact, implementing these types of strategies could lead to an increase in wealth.

If competition is a buyer’s biggest concern, for goodness’ sake, get in the game. In a new survey of close to a thousand home buyers conducted by Redfin, affordability is still the number one concern but due to low inventories, competition from other buyers is moving its way up the poll.

26% identified affordability while 19% mentioned competition and 15% mentioned low inventory as their respective top concerns. To win, athletes study the competition to come up with a plan and buying a home is not different.

1. Ask what terms are important to the seller before you write the offer.
2. Once you decide to make an offer, do it as fast as you can, hopefully, to be the only one the seller is considering.
3. Make a good (or possibly, your best) offer in the beginning; you may never get a chance at improving it. In highly competitive situations, offer above the list price.
4. Attach your pre-approval letter from a respected lender. This means you’ll need to get pre-approved before you even think about writing an offer.
5. Have your lender call the listing agent to reassure them of your ability to qualify.
6. Include a higher than normal amount of earnest money to show you are serious.
7. Eliminate unnecessary contingencies.
8. Write a personal, hand-written letter telling the seller what you like about their home and why you want it. Consider including pictures of your family.
9. Minimize seller expenses paid for the benefit of the buyer.
10. Shorten inspection times.
11. Don’t ask for personal property.
12. Be flexible on closing dates to accommodate the seller’s move.

Once you find your dream home, don’t take a chance on losing it. Write a winning offer that will be good for both the sellers and the buyers.

Parents, with children getting closer and closer to entering college, may also be feeling stress because they haven’t saved enough for tuition and other expenses. It’s estimated that the average cost for the 2015-16 school year is $32,405 for private colleges, $9,410 for state residents of public colleges and $23,893 for out-of-state residents.

If you started saving the year your child was born, you’d have to save $4,608 per year for 18 years at 5% to accumulate $129,620. If you waited until they were 10 years old, you’d have to save $13,574 per year to have the right amount. Saving enough can be difficult if you have a lot of time but if you only have a short time to meet your goals, it can seem impossible.

Student debt is one way to handle the tuition but many parents are reluctant to saddle their children with the obligation. Currently, there is more than $1.2 trillion in outstanding student loan debt to 40 million borrowers with an average balance of $29,000. Some economists suggest that this debt is delaying would-be buyers from making their first home purchases.

There is another way to pay for the education by making an investment in a rental property. Rents are continuing to rise, homes in owner-occupied neighborhoods are appreciating and the leverage due to borrowed funds can be a huge help in building the equity to pay the tuition.

Rent the home and maintain its condition over the years. As the loan amortizes and the value increases, the equity will grow. When your student is ready to start college, you’ll actually have several options.

You can sell the property; pay the tax on the gain at the reduced capital gains rate and fund the education. Another option would be to refinance and take the proceeds to pay for the tuition. This would allow you to continue to own the asset but would free your equity. Under current tax laws, it is a non-taxable event.

In effect, your tenants are paying to send your kids to college.

It is estimated that seven million out of 50 million homeowners could save money by refinancing their existing mortgages. Obviously, if the replacement mortgage has a lower rate than your existing one, you will save money.

If you bought a home before 2011 and are paying mortgage insurance, you should investigate refinancing to eliminate that requirement. Even if you don’t get a lower interest rate, the savings could amount to hundreds of dollars a month.

If a home you purchased since 2011 has appreciated enough, it could easily justify refinancing to eliminate the required mortgage insurance. Most loans don’t require mortgage insurance if the loan-to-value is 80% or less. There are some programs for 90% mortgages that don’t require mortgage insurance. It is certainly worth investigating with a trusted mortgage professional.

Continuing to pay mortgage insurance that could be eliminated is like having a broken cell phone and continuing to make the monthly payments for something you can’t use and don’t need.

If your current mortgage is several years old, instead of getting a new 30 year mortgage, you might consider a 15-year term. The money you save with a lower interest rate could help you to retire your loan in a shorter time so that your home would be paid for.

Credit scores are used by lenders to measure the credit worthiness of borrowers. While there are several different companies that offer scores, the FICO, Fair Isaacson Corporation, is the model that is used most often.

There are five key components that determine the overall score or rating. The most emphasis, 35% of the overall score, is placed on payment history which reflects whether the borrower paid on time and as agreed by the terms of the credit. Being late, missing payments or going into default would have adverse effects on this part of the score. 

The second largest component, 30%, is credit utilization or the amount owed in relation to amount available. A person might have a $4,000 outstanding balance on available credit of $20,000. This would be a 20% ratio and would be considered acceptable. Owing $15,000 on $20,000 of available credit would be a 75% ratio and would negatively affect this part of the credit score. FICO says people with the best scores average around 7% credit utilization.

The length of time each account has been open and the account’s activity determines 15% of the total credit score. By having a longer credit history, the credit provider has a better indication of the borrower’s long-term financial behavior. Having an open account without activity doesn’t offer a provider much information.

New credit and types of credit each account for 10% of the total score. New credit can adversely affect a score because it is a new obligation without history of how it will affect the borrower’s ability to repay all of their liabilities. Types of credit include both revolving and installment debt. A good mixture of each can indicate less risk for lenders.

The combination of all five areas make up the total score which lenders use to determine credit worthiness. Another confusing issue is that all credit scores are not mortgage credit scores. This particular score determines not only whether the lender will make a mortgage but at what interest rate.

The best place to get your credit score if you’re planning on purchasing a home is from a trusted mortgage professional. This person will be able to suggest things to improve your score if necessary. Buying a home is one of the largest investments in most people’s lives; it is really not a do-it-yourself activity.

A homeowner’s tax savings benefit is generally realized when they file their federal income tax return after the money has been spent for the interest and property taxes. Some people look forward to the refund as a means of forced savings but some people need to realize the savings during the year.

It is possible to adjust the deductions being withheld from the homeowner’s salary so they realize the benefit of the savings prior to filing their tax returns in the form of more money in their pay checks. Employees can talk to their employers about increasing their deductions stated on their W-4 form.

By increasing the exemptions or deductions, less is taken out of the check and the employee will receive more each pay period. If a person over-estimates their exemptions and therefore, underpays their income tax, they might incur interest and would have additional tax to pay when they filed their tax return.

Buyers considering this strategy should seek tax advice and discuss it with their human relations department at work. Additional information is available on the Internal Revenue Service website about Completing Form w-4 and Worksheets.