Whether or not you should pay down your mortgage depends upon your plans and the other circumstances in your life. Let’s take a look at the pros and cons.
First, the pros…
Your mortgage will be paid off sooner.
For many who plan to live in their homes indefinitely, paying it off sooner is a huge incentive to add dollars to each month’s payment. When you stop to consider that in the early years of a mortgage loan the bulk of the money is going toward interest, an increase of just a few hundred can knock a full month off the end of your loan.
Just to round things off, consider that you have a $1,200 per month payment and only $300 is going toward the principal. Paying $1,500 is akin to making two payments at once. If you do that for a year, you’ll reduce your loan term by a year. Of course, as you pay down the loan, the ratio of principal to interest will change.
You’ll pay less interest over time.
Let’s assume for a moment that you have a $250,000 fixed-rate mortgage with a 4% interest rate and 30 year amortization. Your monthly principal and interest payment will be $1,193.54. If you pay that amount for 30 years, you will have paid $179,673 in interest.
Should you decide to pay $1,400 per month instead, you’ll pay off the house in about 274 months, and pay a total of $133,600 in interest.
The less you owe, the more equity you’ll have.
This could be a benefit if you some day wish to take out a home equity loan for improvements, or if you wish to sell and use your equity as a down payment on a new home.
The less you owe, the better your credit score.
This could be important at some time in the future, since high scores equal lower interest rates on everything from a car loan, to credit cards, to a mortgage on a vacation home.
Now for the Cons…
Paying less interest could mean paying more income tax.
Depending upon your financial situation, your mortgage interest could be helping to reduce your tax bill. Since tax regulations have changed, this is something to discuss with your tax accountant.
Paying more on your mortgage might mean paying more interest on higher interest debts.
Look at your car loan, a student loan, or a credit card balance before deciding to pay down the mortgage. When you have extra funds to use, it’s always wise to pay off the highest interest debt first.
You might be wise to put more into savings.
First, everyone should have an emergency fund. Having 6 months or more worth of cash in a readily available account will give you peace of mind. Then, consider putting more into retirement funds, especially if your employer will match your contributions.
Your mortgage loan could have a pre-payment penalty: Beware!
While this isn’t as common as it once was, some lenders do add a pre-payment penalty clause to their mortgage agreements. This penalty could equal several months’ interest or be a percentage of the balance due. Be sure to read your mortgage loan documents carefully before deciding to pay down your mortgage.
Interest rates are still way down – so if you’re ready for a refinance, get in touch.
And just so you know, here at Homewood Mortgage, the Mike Clover Group, we never add pre-payment penalties to our mortgage loan documents.
Call us today at 800-223-7409