Making extra mortgage payments might seem worthwhile when you can afford them, but is it really the best way to use your money? What benefit does making extra payments to a mortgage offer to you? Here are some of the pros and cons of making extra payments over and above the regular monthly mortgage payments you must make.
Extra Mortgage Payments: Benefits
Reduced interest: Your regular payments pay all the interest plus some of the principal. What you would pay in extra mortgage payments would all be deducted from the principal. That means that next month the interest on the reduced principal would be less, and so on. Over time you could pay a significant amount less interest to the lender. This is assuming that you continue your payments over the entire period of your original mortgage agreement.
Private mortgage insurance: Not all extra payments have to go towards your mortgage. If you are paying private mortgage insurance, you can make extra payments to pay off your PMI earlier. Having done that you can then assess whether you want to continue and reduce your mortgage – and its interest as above.
Peace of mind: Everybody feels better when they are paying their mortgage faster than they need to. They feel protected against foreclosure in the event of them hitting bad times. They think that they are doing better than most people with mortgages by paying extra – more than then need pay.
These are just three benefits of extra mortgage payments, although none are genuine benefits. Here are some reasons why, and arguments against paying your spare cash to your mortgage account.
Disadvantages of Making Extra Motgage Payments
Do you gain: What do you actually gain by making extra motgage payments? Mortgage interest rates are very low right now in comparison to what they once were. You could make more by investing your spare cash. Not only that, but what mortgage interest you do pay you can claim against tax. You can practically deduct 1% from your mortgage interest rate that way.
Best to Invest: Would you be paying all you spare cash in extra mortgage payments? How about saving for emergencies? What if you lost your job? It is always wise to have several months mortgage payments tied up in an investment, quietly gaining in value for the day that you might need it. It could pay your mortgage and other expenses for two or three months while you found other employment. Without it, you could face foreclosure!
Lenders don’t care: Your lender would not care if you had paid extra to your mortgage – they want this month’s payment, and the next, and the next! It’s better in your bank than reducing your term from 30 years to 25. Then you could pay the next few months and give yourself time to get back on your feet.
Extra Mortgage Payments: Conclusions
Extra mortgage payments are worthwhile in some situations. If you are not fully committing your income to such payments, and can also invest some to protect you from emergencies, then they can be worthwhile.
However, you should never leave yourself vulnerable to unexpected financial crises. Extra mortgage payments are not recoverable once paid. Investments are, and can see you through difficult times. Consult a mortgage advisor on this, because each person’s circumstances are unique, and the same solution does not apply to everybody. For more information, please contact Anthony DiLeo at (732) 264-2700 x 18, or email at [email protected]