Whether or not to pay extra on your mortgage payments is a question a lot of homebuyers struggle with.
Of course, as with all things financial, it depends on your personal situation. But we’ll go over reasons why it’s beneficial to pay extra on your mortgage, as well and reasons why it might not be the best option.
Why Pay Extra?
Paying extra on your mortgage payments reduces the overall balance of the loan (the principal), which is what the interest payments are based on. So in that sense, if you make extra payments, you decrease the principal. As a result, that decreases the amount of interest you’ll have to pay over the life of the loan.
It’s important to note that it’s more beneficial the more regularly you do it. If you make additional principal payments every month, it will more greatly reduce the principal of the loan than it would if you only paid, say, $100 extra one month out of the year. Additionally, it’s a good idea to start sooner rather than later.
Another thing to consider is that even if you plan on moving and selling your home down the road, possibly before you pay off the mortgage, it can still be beneficial to make extra mortgage payments as it helps you build home equity.
Related: Why Should I Build My Home Equity?
How to Pay Extra
Before making extra mortgage payments, check with your lender to see if they allow prepayments so you don’t get penalized.
Also, make sure the payment is going towards the principal, not the next month’s payment (this will not decrease the principle; it will only decrease the next month’s payment).
Here are three examples of how to make extra payments on your mortgage:
- Add principal payments monthly
- Make yearly principal payments
- Make lump-sum payments when possible.
For more details on each of these methods, read 3 Ways To Pay Off Your Mortgage Faster – And Save Money.
Why Not Pay Extra?
While there are benefits to extra mortgage payments, that doesn’t mean it’s the best choice for everyone.
- You have other funds that need to be built up or replenished. Are you prepared for a rainy day? If you’re hospitalized or lose your job, do you have emergency funds to cover it? If not, it might be better to put your extra money in an emergency fund rather than putting it toward your mortgage. Additionally, it’s never too early to start thinking about retirement.
- You have other debts with higher interest rates. It’s always a good rule of thumb to pay your highest-interest debts first. So, if you have credit card debt or student loan debt with higher interest rates than your mortgage, you could start there before paying extra on the house.
- Your money would bring more of a return elsewhere. If you have some extra money, paying down your mortgage might not always yield the most return. You could pay for some new certifications to advance in your career or invest your extra funds.
There are other reasons you might not want to pay extra on your mortgage. For example, you can deduct the interest you pay on your mortgage, which can save you money come tax season (however, that shouldn’t be your only consideration when deciding whether or not to use the extra cash to pay down your mortgage).
More on Mortgages
So, in the end, it really comes down to your personal finances. Before you make any decisions, sit down with your budget and consider talking it over with your financial advisor.
Mercer Savings Bank is also here to help if you have any questions about mortgages or mortgage payments. You can contact us or visit one of our locations at any time. For more on the ins and outs of mortgages, read our guide, Mortgage 101.
We hope this was helpful! However, remember that this blog is for informational purposes only and shouldn’t be considered financial advice. You should talk to your financial advisor if you have questions about what would best fit your needs.