Examples of higher-cost debt include most private student loans, auto loans, department store cards and revolving credit cards.
Another option is to deposit your windfall into a savings account and set up an automatic monthly payment from that account to your mortgage, Rogoszinski says. That way, you can have money in the bank and put money toward paying off your mortgage, too.
A more aggressive approach is to invest the lump sum for a return that’s higher than your mortgage rate, then use the principal plus appreciation, dividends and interest to pay off the mortgage when you retire, McIntosh says.
—Refinance to speed up payoff: Refinancing can help you pay off your mortgage sooner, the idea being that a lower payment frees up money that can be applied to additional principal payments.
The challenge is being able to qualify for a new loan, says Justin Lopatin, vice president of residential banking at Baytree National Bank & Trust in Chicago.
The biggest hurdle, Lopatin says, is the effect of declining home values. A lower valuation can throw off your loan-to-value ratio, result in an appraisal that’s too low to support your loan amount, or trigger a need for mortgage insurance, making your new payment more costly and refinancing less attractive.
You’ll also need an up-to-par credit score and two years’ worth of documented stable income, Lopatin says.
To maximize the benefit of refinancing, shorten the term of your loan. For example, if you’ve paid off 10 years of a 30-year term, refinance with a 15-year mortgage instead of a new 30-year loan.
—Shrink your housing costs: Selling your house might seem like a dramatic way to get rid of your mortgage, but it’s certainly effective, leaving you free to buy a more affordable home for cash or become a renter without any housing debt.
Whether downsizing makes sense is largely a matter of your needs and personal lifestyle, yet Rogoszinski says it’s “definitely something to consider.” But don’t try to time the housing market by selling high and buying low. That’s a strategy more appropriate for professional real estate investors than homeowners.
—Tap retirement savings: Homeowners who don’t have spare cash on hand might be tempted to tap a retirement account to pay off a mortgage. This idea has gained purchase in recent months, as legislation pending in Congress would waive the early withdrawal penalty if money removed from a retirement account were used to pay a home loan.
Still, Rogoszinski and McIntosh advise caution.
“My instinct is not to look at that very favorably, particularly because of how little retirement savings Americans have already,” McIntosh says.
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