One question many homeowners are asking themselves in the face of today’s low mortgage rates is whether or not to make extra payments on their mortgage. It may seem like a no-brainer; making these kinds of payments on a regular basis will shorten your loan, as well as lower your borrowing costs overall. But are there also pitfalls to watch out for when making extra mortgage payments?
The truth is that there are many potential pitfalls if care isn’t taken to make the decision. Unfortunately, the decision process itself can be complicated as well, generating many more questions than it seems to answer. In order to figure out whether making extra payments will benefit you, you will have to consider not only the financial, but other sides as well.
Considering All Aspects
Emotionally speaking, if you feel you would be more content knowing your home was completely paid off, this could be a good point for making extra payments on your mortgage. Looking at things logically, if you plan to be in your home for many years, then extra mortgage payments will likely make sense to you. And finally, the financial aspect of your decision will involve thinking about things like whether or now you could be getting a better return on your investment somewhere else.
Different Reasons to Pay Extra
There are different motivators affecting every homeowner who is considering paying off their mortgage sooner with extra payments.
Some homeowners don’t want the specter of monthly payments hanging over them as they are trying to enjoy their retirement. Others are worried about what’s happening in the headlines and, fearing the downturn of the markets have opted to make extra payments.
Still others have financial goals which exceed paying off their homes, such as financial security in the event of job loss. For example, a homeowner may be paying a lot more in extra payments while they are still employed. This will allow them to exist with very little money in the event that they become unemployed.
Why Not to Pay Down
There can be as many reasons not to pay down a mortgage. If you’ve recently refinanced to an incredibly low rate, then you probably won’t see much benefit to making extra payments on your mortgage.
Investing for a higher return, also known as out-earning your mortgage rate can be another reason not to prepay. But it will require being confident that your investments will bring you a higher return than making extra mortgage payments will.
Making extra payments may also not be an option if you owned a home before and did this already. Chances are that mortgage rates weren’t as low then as they are now, and so paying down the mortgage made more sense.
In the end, you may decide to split the difference by making some extra payments and prepaying your mortgage. This may indeed be the best decision for homeowners who aren’t sure which road would be best. As well, it can work well during times of market uncertainty.