Should you make extra mortgage payments?

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Suzanne Plewes, RE/MAX Alliance in Loveland

Suzanne Plewes, RE/MAX Alliance in Loveland

You’ve probably heard people say that it’s a good idea to make extra mortgage payments. This pays down your balance and can significantly reduce the number of years that it takes to pay off your mortgage. However, it’s important to note that it’s not necessarily a good idea for everyone. The advice has just been repeated for so long and across so many generations that people tend not to question it further. Before you start making extra payments on your mortgage, here are a few things to consider.

Why make extra payments?
Your monthly mortgage payments are based on the balance of your loan plus interest charges. For a 30-year fixed rate mortgage, the monthly payments remain the same for the life of the loan, but the amount attributed towards the principal balance versus interest changes every month. In the early years of a mortgage, most of your monthly payment covers interest.

If you make extra payments, it applies directly towards the principal balance of the loan (although you must specifically note this when sending in your payment). In doing so, you are reducing the loan balance and total interest charges on that balance. Your monthly mortgage payments remain the same, but your loan will be paid off sooner as a result.

Why extra payments may not be a good idea
On its own, it certainly seems like a good idea to make extra payments. However, it’s important to consider other aspects of your finances.

First, a mortgage is typically lower in interest rate than other types of loans. If you have a car loan, credit cards or other debts with higher rates, it would make more sense for you to pay down those balances first. This saves you the most money overall. Extra mortgage payments are only beneficial if you do not have other loans with higher interest rates.

Secondly, you should only make extra payments if you have “extra” savings. Your mortgage should not be used as a savings account since it cannot be easily accessed. If you place money in a bank account, you can easily make a withdrawal for a car repair or other unexpected expense. Money paid into your mortgage cannot be so easily withdrawn. You would need to obtain a home equity loan or refinance your mortgage. This takes time and will cost money.

Should I make extra payments?
Simply put, it’s great to make extra mortgage payments if you can afford to do so and if the money is not better spent somewhere else. Like everything else in real estate, personal circumstances play a big role in the decisions that you must make.

Suzanne Plewes is a broker associate at RE/MAX Alliance. Write to 750 W. Eisenhower Blvd., Loveland, CO 80537, call 970.290.0373 or e-mail suzanneplewes@remax.net.

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