Should You Make Mortgage Prepayments a Priority?
Financial expert Liz Pulliam Weston answers consumer debt and mortgage questions via her website, asklizweston.com. One of her recent advice columns deals with the often difficult subjects of credit scores and mortgage prepayments, and appeared in Sunday’s Newark Star-Ledger.
THE QUESTION:
Can you address how to set priorities if you aren’t in the position where you seek debt consolidation? I make under $25,000 a year, so there’s not a lot of slack in the budget, but I do pay my credit card balances in full every month. What I’m trying to figure out is how to choose whether to get disability or health insurance.
I can’t do both, and I’m self-employed. I’m also trying to put 10 percent into my individual retirement account every month and build my emergency fund from three months to six months.
And I’m still chipping away at taking care of the house. I bought a fixer-upper three years ago and, thus far, have replaced all major appliances, gotten it weatherized and painted the trim, but there’s always more to do, right?
I’d love to accelerate paying down my home loan, obviously, but not sure it comes before the insurance choice.
THE ANSWER:
Prioritizing wisely is the essence of good financial planning. The less money you have, the more important prioritizing is - and the more likely you’ll have to make some painful choices.
For most Americans, the plan of accelerating your home loan might be filled with good intentions, but using mortgage prepayments should rank pretty low on the to-do list.
The first priority for just about everybody should be getting on track for retirement, then paying off credit card debt or any other high-rate debt.
Having some kind of emergency fund, even if it’s only $1,000, is the next step. You shouldn’t think about prepaying a mortgage loan until you’ve paid off all your other debt, are on track for retirement, have a fat emer gency fund and have all your insurance bases covered.
There’s also the fact that many lenders impose prepayment penalties. But the most important factor is that you’re not quite to the point where you should worry about this, and may not be for a while. The unfortunate reality is that disability insurance can be expensive, not to mention difficult to get, for the self-employed.
THE QUESTION:
I filed for bankruptcy a year ago. I’m trying to restore my credit. I have some collections on my credit report that are relatively small, but they were discharged in the bankruptcy. If I pay these off and have them deleted from my credit reports, would it boost my credit score?
THE ANSWER:
If you could actually persuade the collectors to stop reporting these small accounts to the credit bureaus in exchange for payment, you might see some small improvement in your scores. What’s really going to bolster your credit score, though, is proven, responsible use of credit.
That usually means having and using one or two credit cards. If all your cards were closed during bankruptcy, you may need to apply for a secured credit card, which gives you a line of credit equal to an amount you deposit with the issuing bank.
Another technique that can boost your credit score - the three digits that a mortgage company will use to gauge your credit-worthiness - is getting a smaller installment loan such as a car loan or a personal loan and paying it back over time.
You’re likely to pay high interest rates at first, but if you make all your payments as agreed you should see a notable increase in your scores. Then you’ll be able to qualify for prime rates and not have to resort to a bad credit mortgage.