It’s never fun when there’s more month than money. Fortunately, you’re not dealing with that situation. In fact, you have a little extra left over at the end of the month, and that’s got you wondering: Should I make extra mortgage payments? The decision isn’t quite as easy as you might think. Of course, that might be because there are lots of right answers. How do you choose the one that fits your situation?
Should I Make Extra Mortgage Payments?
How do you decide whether to put your extra money towards your mortgage? Weighing the pros and cons of making those extra payments is a good start. You’ll also want to consider the various ways that you can make extra mortgage payments. Armed with that information, you can create a custom plan that suits you.
Why Should I Make Extra Mortgage Payments?
As The Balance indicates, the main advantage of making extra mortgage payments is that you can save money. When you pay down your principal balance early, you reduce the amount of interest that you owe, and the total cost of your loan. This means you’ll ultimately pay less and be out of debt sooner.
Why Shouldn’t I Make Extra Mortgage Payments?
Being out of debt sounds great, but as MortgageCalculator reports, opportunity cost is a real concern. Money that is invested in your home is money that you can’t invest elsewhere. While you have to invest your required mortgage payment, it’s worth asking if the extra money could be put to better use in a different place. Should you be concerned about the lack of diversification in your investments if you sink everything in your home? Could you be missing out on tax breaks by paying off your mortgage early? What about your retirement? As Investopedia notes, the nature of compounding interest means that it’s generally best to start saving for your retirement as soon as possible. Neglecting your retirement planning to pay off your mortgage sooner could come back to haunt you when you’re older.
How to Pay Extra on Your Mortgage
If you decide that you do want to make extra payments on your home loan, how should you do it? As Interest.com explains, there are several ways to pay extra on your mortgage:
- Add a little extra to your monthly payment. You could simply round your monthly payment up. For example, if $544.17 is due, then pay $550 each month. You could also add an extra $10, $25, or $50. Any extra amount that’s paid to the principal will ultimately save you money on your home loan.
- Make an extra payment each year. Some borrowers set a goal of making one extra mortgage payment each year. Again, the extra payment should be designated as a principal payment.
- Make lump-sum payments. Another popular strategy is to use a portion of any windfall to make a lump-sum mortgage payment. Whether it’s a gift from a family member, a bonus at work, or some other windfall, using it to pay down your home loan frees you from your mortgage sooner.
Mistakes to Avoid When Making Extra Payments
As SmartAsset warns, making extra mortgage payments can have its dangers. To get the most out of your money, don’t rush. Consider all your options, and make sure that paying off your home loan is the right course for you. Be careful not to leave yourself cash poor. If you don’t have an emergency fund or retirement savings, you may want to build those resources first. Also, make sure that your home loan doesn’t have a prepayment penalty clause. If it does, you may want to look into refinancing. If you do decide that making extra mortgage payments is the right choice, be sure to mark all extra payments as principal payments.
You’re one-of-a-kind, and your financial situation is also unique. Don’t settle for cookie-cutter advice about home loans. At PrimeLending Dallas, we take the time to talk with you in order to learn about you, your situation, and your housing goals. Then, we work with you to offer personalized service and friendly, knowledgeable guidance. With our wide range of loan products, it’s easy to find a home loan that meets your needs. Contact us today to investigate the possibilities.