Before You Make Extra Mortgage Payments, Read This

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

Conversations about refinancing, loans that help my clients buy and sell simultaneously, and 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. Especially as our rate environment has changed so much in the last year, and because the cost of our day-to-day lives has increased dramatically, these are important conversations to have.

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 25 or 30 year mortgage sooner than making the 300-360 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 25 or 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.
Given today’s rising mortgage rates, it may no longer make sense to invest your money elsewhere to get a higher return. This is because the cost of borrowing has become greater then the return you could receive if you invested your
However, it’s worth investigating your options. If you can get a better return on your money if you invest it wisely then its better to do that 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) 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!

8) In a fixed rate mortgage with a low rate? 
If you are in a fixed rate mortgage that you locked in at a much lower rate than you would get today, you may be feeling pretty comfortable. However, it might be in your best interest to try and pay down as much of your mortgage as you can while you are enjoying your low fixed rate. Keep in mind that when your term is done, the interest rates could be much higher than your current loan. If you can pay off as much as the principal as you can, the jump in the cost of your mortgage when your current term is up, may not feel as painful. 

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.