Before You Make Extra Mortgage Payments, Read This

I’ve been having a lot of conversations about mortgages lately. 

Conversations about refinancing, about loans that help my clients buy and sell at the same time, and conversations about whether it makes sense to pay off your mortgage early or even make extra payments if you have additional funds. 

I love talking about mortgages and how they can be a financial tool to help make your real estate and life goals a reality.   Need money to pay for college?  Maybe tapping the equity in your home is an option to consider.  Lots of those types of discussions. 

When it comes to paying off or paying down your mortgage, it can be tempting to put extra money toward your mortgage in hopes of pay off your 30-year mortgage sooner than making the 360 payments it usually takes.  

But is it smart financially, even though you could save all that money on interest payments?

Not for everyone!  It depends on your stage of life, your finances and your goals. 

Let’s put aside the emotional relief of paying off your mortgage for this conversation and just look at the basic math or purely “financial” side of the situation.

Here’s a rundown of the aspects of having a mortgage that you should consider before you pay down your mortgage:

1) It won’t change your monthly payment unless you refinance.

Paying down your mortgage will not decrease your monthly housing costs unless you refinance or ask your lender to “recast” your loan, which they are not obligated to do.  All it will do is get your loan paid off earlier than 30 years … but if aren’t interested in living in this home for 30 years, then don’t pay down your mortgage!

2) You won’t get “more” out of your home the “more” you pay down your mortgage.

Your home will be worth the same amount when you go to sell whether you pay down your mortgage or not. However, if you put the same money in another investment that you would otherwise have put into paying down your mortgage -- THAT money could grow.

In other words, you don’t get “more” back when you pay down your mortgage when you sell your home, you just get your savings account back. And you’ll have many years ahead without access to that money you used to pay down the mortgage until you sell (or refinance), which also include additional costs for those transactions.

3) Put your extra cash where you can touch it.

With so much uncertainty in the economy, having a steady cash flow is essential. Once you put any extra money toward your mortgage, you can’t get it back. Basically, equity in your house isn’t as easily liquidated as having it in your bank account!

You want to have a robust savings that you can turn to for emergencies that will hold you over just in case you lose your job or face an unexpected medical crisis. Most experts advise to have enough cash for at least 6 months’ worth of living expenses, and that should be your first priority.

4) Max out all other parts of your financial portfolio first.

Your home should be just one aspect of your entire financial portfolio. Make sure that you not only have an emergency savings account, but other investments as well so that you are diversified. One example of this is to make sure you are maxing out your retirement plans, especially so you can get that added bonus of a full match from your employer.

5) Pay off higher debt.

If you have the extra money to put toward your mortgage, than consider using it toward other debt first. Paying off higher interest debt, such as credit cards and car loans, rather than a low-rate mortgage, can bring you more financial security.

6) Look for better returns with investments.

If you were lucky enough to buy with a low mortgage rate, it can make more sense to invest your money elsewhere at perhaps a higher return.

You can easily get a better return than that with your money if you invest it wisely rather than paying down your mortgage. As always, check in with your tax and financial advisors to see what’s best for YOUR particular situation.

7) Don’t forget the tax break.

The benefit of deducting your mortgage interest is something to keep in mind. This tax break is an added perk that makes it well worth keeping your mortgage around. This is especially true if you’re only a few years into your mortgage and not near retirement age.

8) Determine your homeownership plans.

It doesn’t make sense to put extra money into your mortgage if you plan to move in a few years, whether you’re trading up or downsizing. You don’t know what the market will be like when it’s time to sell and it’s better to have that cash on hand to help purchase a new place. Having cash in your bank and not in your home when you want to move makes buying the new home so much easier!

As you can see, paying off or paying down your mortgage is not the best decision for every homeowner.  The “right” answer depends on your specific financial situation and stage of life.

These are just some things to consider.  If you’d like to talk more, email me and we can set up a time to talk.  I can also refer you to financials advisors, accountants or loan officers that can help as well. 

Next week, I’ll continue with this topic with a twist and focus how to know when you should pay down your mortgage.