In May 2007 I wrote a story about a scheme to pay off a mortgage early. I received emails from around the country; some from people doing due diligence on the $3500 software program; many wanting information on a free software program which does essentially the same thing. It is now time for a follow up story:

You should consider paying off your fixed-rate mortgage only if:

You have an emergency fund and the ability to refill if it is used.

You are saving at least 10% of your gross for retirement.

You put money every month into a college fund for each child.

You contribute regularly to 3-6 other savings "buckets."

You have adequate insurance.

You have a budget and know what your expenditures are.

You have extra money to invest with the specific goal of reducing your mortgage.

In addition, you must carefully consider the following:

Figure your effective mortgage rate (rate which includes tax advantages). If you are able to beat your effective mortgage rate through other investments, do not pay down your mortgage.

Understand the effect of inflation on your mortgage payment and on your home's value. Answer the question, would I be better off paying $1 now or $1 ten years from now, 20 years from now, 30 years from now? My first home in Virginia cost me $46,000 with a $37,000 mortgage and a $310 monthly payment. My first payment was $310 (half my take home). My last payment was $310 (by then, an insignificant amount). That house now is worth almost $700,000. Amount gained from paying off the mortgage: $37,000. Amount gained from appreciation: $654,000. Realize that the appreciation of your home will come primarily from the increase in home value, not decreasing the mortgage.

Understand that paying down a loan on an appreciating asset (your home) is just not smart business.

Think about why you have a mortgage in the first place - because you could not afford to buy the place all at once. You took out a mortgage with a monthly payment you could afford (hopefully). If you increase that payment by paying off the principal, you run the risk of spending beyond your means. In the MMA example ($5000 income and $4000 in expenses), the only way to pay off a 30-year mortgage in 12 years is to apply all of your discretionary income ($1000 per month) to principal. Paying down your mortgage with the entire amount of discretionary income is financial suicide.

Paying down your mortgage is an illiquid investment. There is no cash flow advantage until you sell your home or until the mortgage is paid off. Cash flow should be the most important consideration when comparing your income to your expenditures. And don't forget that most people sell their homes in 5-10 years.

Paying off a fixed rate loan with a variable rate loan is irresponsible.

I am in the financial planning business, and I can tell you that uncontrollable debt is a major problem today. To give most families a blank check in the form of a HELOC will inevitably lead to financial disaster.

I am against the 5% commission on mutual funds sold by financial salesmen because it can be done for nothing. I am against the 70% commission on the MMA because it can be done for nothing.

Buyer beware.

Bill Stanley, the Money Coach, MoneyCoachBill@aol.com