You have extra cash. Now, you have a question: Is making extra mortgage payments a good idea? The answer may seem obvious, especially if you’ve always dreamed of owning your home outright and living without a mortgage payment. However, the reality is that there isn’t one right answer to that question. Instead, you need to consider your goals and the specifics of your situation before you can decide what move is best for you.
Is Making Extra Mortgage Payments a Good Idea?
Having more money than you need to make ends meet is undoubtedly a good thing, but it does present one problem: What is the best use of the additional cash? Is making extra mortgage payments a good idea? Weighing potential priorities, understanding the pros and cons, and exploring methods of delivery can help you decide.
A Question of Priorities
It’s easy to understand the appeal of owning your home free and clear sooner rather than later. However, as The Washington Post reports, homeowners considering whether to make extra mortgage payments need to weigh their financial priorities carefully before proceeding. After all, a home is a key part of your financial picture, but it’s only one piece:
- Do you have an emergency fund with six months’ income tucked inside? If not, you’ll want to fund that first.
- Have you contributed the maximum to your retirement account? That should probably be your next priority.
- Do you have other high-interest debts? Credit cards, personal loans, student loans, and car loans all tend to come with a higher interest rate than a mortgage. Plus, they generally aren’t tax-deductible. That means paying them off first typically makes sense.
- Would investing the money provide a better return? You can save money by paying off your loan early. However, investing the money wisely might offer an opportunity to secure greater rewards.
The Pros and Cons of Making Early Mortgage Payments
Understanding the pros and cons of making early mortgage payments can help you decide whether you should venture down that path. What benefits does it offer? For starters, making early payments can provide substantial savings. PrimeLending’s Extra Payments Calculator makes it easy to see how extra principal payments can help you save money and own your home sooner. For some people, the psychological benefit of owning a home outright is empowering. The security that reaching that goal provides tips the scales in favor of paying off the house over any financial benefits that other investments might offer.
However, as SmartAsset notes, there can be some downsides. Some home loans have prepayment penalties, so paying your loan off early can cost you. It’s also important to weigh the opportunity costs. What else could you have accomplished with the money that you’re using to pay off the mortgage? Would it have produced greater wealth? Would it have given you greater flexibility to respond in an emergency?
How to Make Extra Mortgage Payments
If you decide that making extra mortgage payments is a strategy that you want to use, how do you do it? For starters, check that there is no prepayment penalty. Then, contact your mortgage servicer for instructions regarding the extra payments so that you can be sure that they’ll be processed properly. Also, be sure to mark any extra funds as principal payments. After that, you’ll simply need to select a method that suits your situation. You have several options:
- Make one extra mortgage payment a year. Do this as a lump sum. Or, add 1/12 of a payment to your regular payment each month.
- Round up your mortgage payment. If your payment is $842, pay $850 or $875. Be sure to indicate that the extra should go toward the principal balance.
- Put extra funds toward your mortgage. When bonuses, gifts, or tax returns arrive, make it a habit to send them to your mortgage company as principal payments.
Whether you’re interested in buying or refinancing, the experienced team at PrimeLending Denver can assist you. With a full range of loan products and top-notch customer service, we’re ready to help you reach your housing goals. Contact us today.