John M. Lee: Accelerate Your Mortgage?

As many Americans struggle with the rising cost of everything from food to fuel, more homeowners are turning to early mortgage payoff plans in the hopes of becoming financially secure.

There are many mortgage acceleration programs available to help consumers do just that. Many financial planners will advise you not to pay off your mortgage early because of tax advantages, but some homeowners are refusing that advice because they want the peace of mind that comes from owning a home free and clear. As well, some want to put the extra funds into other investments.

Most of the available mortgage acceleration programs work with a first loan and a line of credit. The idea is to minimize the interest paid, so all your income is deposited into the credit line, and you use the credit line to pay the first mortgage off quicker. You can also use it for your daily living expenses.

Companies develop software which tracks your income and expense habits, analyzes the interest rate structure on both loans and makes recommendations on how much mortgage to pay every month. Companies who promote these types of programs claim that it will pay off a 30-year loan in half to a third of the normal time. The cost for these programs range from $2,000 to $5,000.

Are these programs worthwhile? Is it something you can do on your own instead of paying the fees?

These schemes work on the current interest rate structure, where lines of credit are at interest rates lower than first loans, making it easier to pay off as much as you can on the first loan. It also makes the assumption that you have the extra income to accelerate your home payments.

If one is disciplined, and makes an extra payment each year on the mortgage, you may shorten the loan term by about five years. If you can make a couple of payments every year, that would shorten your loan term by about nine years. So you can pretty much accomplish what these computer programs would do if you can follow the plan - and without paying fees.

But I think the bigger question is whether paying off the mortgage early makes sense. Most financial advisors counsel against it because it makes your assets non-liquid, and that it creates a situation where one cannot access the equity when it is most needed. Instead, most would advise to keep the cash in secure accounts so it is available when you have emergencies.

A mortgage provides tax benefits in that the interest portion may be written off on your income taxes. It is important during the high-income earning years as it is one of the last large deductions you can claim on your taxes.

Current mortgage rates are at historically low levels, so a loan secured by a home offers one of the least expensive vehicles to get capital. And, if you can leverage off these funds by investing them in opportunities that yield more than your mortgage rate, wouldn't that be a better use of funds?

Lastly, by having a mortgage, it makes the bank your partner. In the event of a major catastrophe like an earthquake and your home is destroyed, you may be able to walk away from the loan because the real estate is the sole security for the loan. This is not a position I advocate, but it is a possible scenario.

The decision to pay off or not pay off your loan is a very personal one because a home represents security. Thus, I would recommend that you consult with a qualified financial planner to discuss your personal situation and proceed accordingly.

John M. Lee specializes in selling real estate in the Richmond and Sunset districts. For questions about real estate, call him at (415) 447-6231 or e-mail him at johnlee@isellsf.com.