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Yes, There Is A Better
Way To Retirement.
Like the woman who asked about planning for her
retirement, many people are worried about whether they
can afford to stop working. While saving for the
future is important, I wish more people would look at
the other half of the equation: If you reduce your
living costs, you won't need to save as much.
Chances are, your mortgage is your single largest
living expense, so just think how much easier life
will be if you pay off your mortgage before you
retire. Of course, even if you pay off the mortgage,
you'll still need to cover your property tax and home
insurance, but that's a small amount compared to most
mortgage balances these days.
You're probably wondering what magic trick you need to
master to pull this off. But don't worry, no magic
required. Let's tackle this one step at a time. All of
this advice assumes you plan to stay in the home you
currently live in.
Make sure you are paying the lowest possible interest
rate on your loan. If your mortgage is above 7.5
percent and you have a good credit rating, please look
into refinancing at a lower rate.
Once you have the lowest possible interest rate,
commit to making extra payments (check with your
lender to see if there is a prepayment penalty). If
you make just one extra mortgage payment a year on a
30-year loan at 6 percent interest, you'll reduce the
term of the loan to 24.7 years. On a $150,000, 30-year
mortgage, that means paying $36,831 less in interest.
The best way to do this is to divide your monthly
mortgage payment by 12.
That number is the amount you should add to your
regular monthly payment. On this $150,000 mortgage,
that would be an extra $75 a month.
Your lender may encourage you to switch to a biweekly
mortgage as a way to pay off your mortgage faster. But
a biweekly mortgage is no different from making one
extra payment a year. There are 52 weeks in a year, so
biweekly comes to 26 payments, which is the same as 13
monthly payments. The problem is that many lenders
will charge $300 or more to set up the biweekly
arrangement, and you might be hit with additional
service charges of $5 or so for every payment. Now you
may not think that's a big deal, but over 25 years at
an annual average rate of return of 8 percent, that
comes to about $9,500. That's a lot of money to waste
when you can arrange the payments yourself.
By Suze Orman
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