Whenever I receive an unexpected sum of money, I divide it into four. A quarter goes to random spending (usually clothes), a quarter goes to charity, a quarter goes to savings, and another quarter goes to the mortgage principal. This is in addition to the extra principal payments we make each month. This is a key part of our college savings plan. Paying off the mortgage early is a great strategy for many families with college-bound kids.
We bought our house in 2000, and our son is scheduled to graduate from high school in 2016. Although the initial mortgage had a 30-year amortization schedule, my husband and I decided that we would pay ahead as we were able in order to have the mortgage paid off before we had college tuition bills. We’ve refinanced a few times since then (currently at a 3.5% rate!), but we’ve increased our payments as the interest has gone down so that we can get the mortgage paid off. Some months, we only round the payment up to the nearest ten dollars. Other months, when a royalty or bonus check arrives, we pay more. At the rate we are paying now, the mortgage will be paid off in 2015.
A lot of people will say that you should never pay a mortgage off early. Why?
The mortgage interest deduction is overvalued. Yes, it is real money, but the deduction is only on the interest, not on the whole payment. The amount of the payment that is interest on a mortgage that’s 13 years in, at 3.5% interest, is pretty small. You only receive the deduction if you have enough expenses to itemize, so most people do not qualify to take the mortgage deduction. You may not lose anything, and if you do lose it, it is likely to be small.
You probably can’t get a higher short-term return in the market. Our 3.5% rate is crazy-low. But given that we will most likely have tuition bills in four years, I would not want to put the money into risky investments. Right now, the stock market is really volatile, and the rate of return on savings accounts is practically zero. My retirement money is in the stock market, because I won’t need it for a long time. But the college money will most likely be needed soon, and 3.5% is better than any CD out there. If your child is in high school, paying off the mortgage may be the best return available once risk is considered.
It probably won’t hurt your financial aid prospects. A family’s expenses figure in to financial aid calculations, although not always the way that many families would like. In very few cases, you won’t get more financial aid by having a high mortgage payment. Housing costs are not considered on the federal financial aid application (FAFSA). Many private colleges will consider reasonable mortgage debts, so if your child is likely to attend a private school and is likely to be eligible for considerable financial aid, then yes, paying off the mortgage early may not be the best strategy. But for everyone else, it’s better to have the mortgage payment gone. The mortgage is the largest monthly expense for most families with school-age children. Get rid of it, and a huge chunk of your monthly income is freed up to pay tuition.
Anyone with a business will tell you that cash flow is a bigger issue than income. If you get the mortgage payment out of the way, then you’ll be used to making that payment and will feel less strain when making it for tuition. You won’t have to rely on savings as much, a key consideration for families with several children who need the college fund to last a lot more than four years. And, if the savings turn out to be a little short, it will be easier to get a home equity loan for the last semester or two if you have equity in your house. Paying the mortgage off early won’t give you spectacular investment returns, but it may make college easier on your budget
If you want to see how long it takes to pay off mortgage, Bankrate has a handy mortgage payoff calculator.
