Savings Tip: Make an extra mortgage payment, or not?

It’s a split decision. Some experts advise making an extra annual mortgage payment. Others say there are better ways to use your money in today’s tight economy.

Perhaps you’d agree with the advisor who says that chopping time and money off your mortgage debt is an emotional thing, not a financial one. You can picture yourself burning your mortgage at your retirement party — or, better still, years before you retire!

Let’s review the pros and cons.

Go for it!

  • If you make just one extra payment each year, it can really drive down your total payments. You’ll save on interest and lop years off your payment schedule. (Figure your actual savings by using a mortgage calculator.)
  • If you’re still paying private mortgage insurance (PMI), reducing your mortgage principal could let you cancel the policy as soon as your balance falls below the required percentage of the appraised value of your home.
  • If you aren’t carrying any high-interest debt, using available cash to pare down your monthly mortgage payment could be a wise investment for the future. Compare the interest rates you are paying on your mortgage with the rate on your other liabilities.
  • Making an extra payment each year, increasing your monthly payment, or paying bi-weekly, could build the equity you have in your home.

Think twice!

  • Again, do the math. Depending on your current interest rate, paying extra on your mortgage means you are putting your eggs into a low-rate basket, when you could be paying down higher-rate liabilities or realizing higher returns by investing that money in a 401(k) or IRA.
  • Would the extra money you’re thinking about putting toward your mortgage serve you better as an “emergency fund” to fall back on if the unexpected should happen?
  • Can your budget handle extra mortgage payments?

If you’re having trouble deciding which course is right for you, ask yourself the six simple questions in this article from Zillow.

P.S. Remember that refinancing might make the most sense, especially if the current mortgage interest rate is more than one percentage point below your present rate. Contact us today for more details.

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