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Understanding how your mortgage fits into your debt picture

If you have a home mortgage, you have plenty of company. About 63% of American homeowners have mortgage debt.1
 
In this case, however, debt is hardly a “four-letter word.” If you have the funds to make your monthly payments, you have what’s considered good debt because homes typically create equity, and mortgages usually are at lower interest rates and may even have tax benefits.
 
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As a result of the benefits, paying down your mortgage ahead of schedule should be lower on your list of debt priorities than reducing bad debt, such as credit card debt or high-interest personal loans. Still, that doesn’t mean you can’t make smart moves to manage your mortgage debt. Here are a few key considerations for homeowners.
 
When should I consider refinancing?
Mortgage rates will fluctuate, making refinancing sometimes feel attractive. But, along with the potential for a slightly lower interest rate, other factors are important in this decision.
 
Refinancing might make sense if:
  • Mortgage rates fall 1% to 2% below your current rate.
  • You want to change the term of your mortgage (say, from 30 years to 15).
  • You want to switch to a fixed-rate mortgage (from a variable rate).
  • Your home has increased in value.
 
Keep in mind that you may have to pay closing costs and other fees. Your mortgage broker or banker can help you understand the costs of refinancing before you make your decision.
 
Is it okay to enter retirement with a mortgage?
Deciding whether or not to pay off a mortgage before retirement should be considered within the context of your overall financial situation. If you have plenty of money sitting in after-tax accounts, you might consider using the savings to pay off your remaining mortgage debt. However, it may make less sense if you have to pull money from tax-advantaged accounts to pay it down. There is also an emotional aspect to consider as many people prefer to hit retirement debt free.
 
When does it make sense to take out a second mortgage or use a HELOC?
Taking out a second mortgage on your home, which can come in the form of a home equity loan or a home equity line of credit (HELOC), may let you borrow money at a lower interest rate than what a credit card or personal loan would allow. A typical use for a second mortgage or HELOC is to complete home improvements that increase the value of the asset you are borrowing against: your home.
 
Beware paying off unsecured debt, such as credit cards, with a second mortgage, because in exchange for the lower rate, you take on the risk of losing your home if you are unable to sustain the payments. 
 
Your mortgage will likely be the last debt you tackle as you work to become debt free, especially if you’re locked in at a low interest rate. That said, if your mortgage is your only debt and you can spare the money, consider making one or two extra payments a year or paying more than your required monthly minimum so that you can pay off your mortgage more quickly. And, if you haven’t already, make sure to set up automated recurring payments for your mortgage so that you never risk paying late.
1 Federal Reserve Bank of St. Louis, 1Q 2019

TIAA does not provide tax or legal advice. This piece is being provided for educational purposes only
and does not constitute a recommendation or advice. You should carefully consider your unique
circumstances before making any decisions regarding your student loans.
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