Paying extra on your mortgage means that you make additional payments to your principal loan balance beyond your regular payments. For example, if your monthly mortgage payment is $1,200, you could pay an extra $200 to the principal for a total payment of $1,400. Not only will these extra payments allow you to become debt free in a shorter period of time, but you can potentially save thousands of dollars in interest.
So making extra mortgage payments seems like a no brainer, right? Actually, it will depend on your current financial picture as well as your long term personal and financial goals, so consult with a financial planner to evaluate your specific situation. Here are some basic factors you should consider when deciding if paying off your mortgage early is putting your money to good use.
Consider Your Age
One decision people are faced with is whether or not to pay down debt or invest. For example, should I pay off my mortgage early or invest in my 401K that my employer is matching?
If you are in your 20s or 30s, you may want to invest and take advantage of compound interest early. For example, if you invest one dollar when you are 20 years old, it can be worth 88 dollars by the time you are 65. If you start saving when your 30, that dollar can be worth 23 dollars. And if you start saving when your 40, that dollar could be worth 7 dollars. That’s is the power of compound interest. If you are in your 20s and strive to pay off your home early that’s great, but you may have missed a better opportunity with contributing to savings early, especially if the interest rates are low like they are today.
Do You Have Savings for Retirement?
What are your plans for retirement? Do you have enough savings? One mistake people make is paying off their mortgage early to become debt free, yet they don’t have any money saved for the future. Being debt free is a wonderful feeling, but if you only have your home as an asset, that is not always a good financial situation, unless you plan on selling the house and downsizing. But if you like your home and want to age in place, be sure you have retirement savings before paying off your home loan.
What is the Interest Rate?
Another factor to consider is the current interest rate. Sit down and figure out exactly how much money you will save by paying off your mortgage early. Can you make more in the market than what you save in interest? If the interest rates are lower, it may make more sense to invest in the stock market or your 401K. Just remember the stock market is volatile so make sure to consult with a financial advisor.
Do You Have High Interest Debt?
If you have any high interest credit cards, car payments or student loans, paying those off should be a priority before you make extra mortgage payments. For example, if your credit card has a 20% interest rate and your home loan is only at 4%, that credit card is costing you a lot more in interest than your monthly mortgage payment.
Looking for a Lender in Rochester, MI?
Julie Krumholz is has been helping Michigan homebuyers for over 30 years and has several loan programs available for various incomes and financial situations.
If you are looking for a mortgage lender in Rochester, MI or anywhere throughout Michigan, call Julie from Main Street Bank today at: 586-382-5482 and let her help you navigate through the loan process and answer any questions you may have.