Dear Liz: You’re not a fan of prepaying student loans in most cases because the extra money sent to lenders is “gone for good” — it’s not like credit cards, where paying down a balance can free up some of the credit line to be used again. But what’s wrong with paying down a primary mortgage? That can create more equity that people could borrow against.
Answer: Perhaps. To tap that equity without selling the home, though, you need a lender’s cooperation, which isn’t always forthcoming when you’re experiencing a financial emergency. If you lose your job, for example, a lender may be reluctant to offer you a cash-out refinance or allow you to establish or expand a home equity line of credit.
Contrast that with paying down a credit card, which typically opens up available credit as soon as the transaction is processed. That’s not guaranteed, of course, because lenders can lower credit limits or even close accounts if your credit scores drop or if bad economic times make lenders more cautious. But for the most part, credit cards are a much more flexible and accessible source of credit than mortgages.
That’s not to say you should never make extra payments on a mortgage. If you’re on track with saving for retirement, you’ve paid off higher rate debt and you have a sufficient emergency fund, then prepaying a mortgage can make sense.
Dear Liz,
My wife and I aggressively paid down our mortgage and now have it paid off, but we don’t have much saved for retirement. I make about $90,000 a year and will receive a pension with the Teachers’ Retirement System of between 30 and 60 percent of that (depending on what option we choose) when I retire in about 10 years. It probably won’t be enough to live on. We will receive no social security benefits. We no longer have the mortgage or extra payments to pay each month and have no other debts, and we would like to make up for lost time as best we can on retirement preparation. What is your best advice for people like us who have diligently paid off their mortgage but have not diligently put money away for retirement?
Thanks for your question, Frank. I may be able to answer it in an upcoming column.