Mortgage California Blog

Is It Wise to Pay Extra on a Mortgage at Today’s Low Rates?

March 29th, 2013

Approved Mortgage loanIs It Wise to Pay Extra on a Mortgage at Today’s Low Rates?

In your mortgage, you pay principal and interest. If you want to pay off your mortgage earlier then it’s due, you pay down the principal. There are many reasons people do way to pay off the mortgage early and there are other reasons not to. Some people want the security of owning their home free and clear whereas others like the tax break the write-off gives them. With interest rates so low, you may wonder if you’re better off spending the extra money in investments.

Two Ways to Pay Down Your Mortgage

So the good news is when you pay even a little bit extra each month, your interest amount will go down making your minimum payments less. So if you continue to pay the same amount, you’ll pay off the principal even faster. It’s one of those nice magical moments.  If your mortgage payment were $644 on a $200,000 30 year fixed mortgage, and you paid only $6 extra each month, you’d save yourself the last four payments.

The second way is to pay part of your mortgage every two weeks.  You should not need to pay someone else to help you get this set up.  Talk with your bank or your lender about an easy way of setting this up.  It also reduces the principal faster and thus reduces the interest rate.

For both methods, you need to ensure that the extra you’re sending in is applied towards the principal and not towards next month’s payment. Also, read your contract or ask your loan officer if you have pre-payment penalties written in.

So Is It A Good Idea

It’s going to depend upon you, your partner (if you have one) and your current financial situation.  USA Today listed five factors to consider:

  1. Your interest rate
  2. Your investment options
  3. Your other financial obligations
  4. Your need for liquidity
  5. Your peace of mind

MyMoneyDesign also had some interesting points to consider.

Pros:

  1. Being debt free. Doesn’t it just feel good to get rid of a payment?
  2. Reducing the amount of money you’ll need during retirement.
  3. Locking into a fixed return rate.

Cons:

  1. Inflation
  2. Better return rate
  3. Evaporating equity
  4. Tax breaks
  5. Other goals (like paying off credit cards, saving for your kids’ college, etc.)

 

So, the bottom line is it’s up to you.  For the interest deduction, if you’re near the end of your mortgage, you’re mostly paying principal, and you may want to consider refinancing for a 15 year mortgage to get a better interest deduction again.  Talk to a professional tax advisor and a certified loan officer to find out what’s best for you and your family.

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