Many Americans hope to some day own their homes free and clear. However, outside of knowing when their currentmortgage is scheduled to be paid off, most do not have a written plan that outlines the progress to keep the goal in sight. Furthermore, most Americans only pay the minimum required mortgage payment without a future plan of when they will be able to pay down any additional principal. A healthy long-term financial plan for those who have amortgage loan against their primary residence should include both a date when they hope to have their home paid off, as well as a year-by-year target as to what they will owe at the end of each year.
The Typical mortgage Cycle – Debt Consolidation Trap
Unfortunately, many families are caught in the cycle of repeatedly accumulating consumer debt and then using equity in their homes to pay off and consolidate the debts they owe. This cycle begins when families spend more than they earn. The first step in escaping this detrimental pattern is learning to spend less than you earn. To do so often requires a budget and the discipline to live within the means the budget allows. By having a written outline of what your spending looks like each month, you will greatly increase the odds of spending responsibly. The power of having a plan in writing may deter the temptation of unnecessary spending that eventually leads to consumer debts.
When to Make Paying off your Loan the Primary Goal
I often see families who have prematurely made paying down their home loan their primary financial goal. One sure, but often unrecognized sign of this is when a homeowner has a 15 year mortgage but simultaneously carries unsecured credit card debts. In other words, they are essentially trading mortgage debt for credit card debt by paying more on their home loan than their budget allows, forcing the deficit to be financed with consumer debt. This is an unhealthy financial habit that often results in the mortgage debt consolidation cycle.
Before making paying off a home loan the primary goal, the following three financial objectives should be met:
• Establishing a cash reserve – Depending upon the stability of the household income, this should typically be no less than three and as many as twelve months of living expenses.
• Payoff all unsecured consumer debt (and sometimes secured debts as well) – At minimum, this should include all consumer debts that are not tax preferred. (Contact me for more information on strategies for the best methods of paying off consumer debts).
• Be on track with retirement planning – It is important to know what monthly contributions are required to meet your retirement goals and then ensure that you are adequately funding your retirement accounts to meet your objectives before making additional principal payments towards your home loan.
It is often said that by committing plans to paper you are greatly increasing the odds of success. As we roll into 2013, I encourage you to spend some time working on your mortgage pay down plan. In many cases, the first step is going through the mortgage review process with a mortgage advisor. If you would like to arrange for a no-cost mortgagereview, call my office at 801-501-7950, or e-mail me at firstname.lastname@example.org. We can begin the process of helping you create a plan to getting you on track to someday own your home free and clear.