A home mortgage payment can be a large or even the largest expense in a person’s budget, and not having this payment any longer can be a life changing experience. Because of this, you may be dreaming about the day when you no longer have to make this payment. Some people may even actively make extra payments to their mortgage in order to pay the outstanding balance off more quickly. These may be funds from an IRS tax refund, cash received from the holidays or a birthday or some other windfall. Before you make the decision about whether to use spare funds to pay your mortgage down more quickly, consider these pros and cons.
The Benefits of Making Extra Mortgage Payments
You can shave many years off of your home mortgage when you make even a single extra payment each year. This can help you to achieve long-term financial goals, build equity and avoid paying more than necessary in interest charges. Keep in mind that any principal that is removed from the outstanding balance now will not generate interest charges going forward. This can have a snowball effect on your home equity, and this is especially true when you make extra payments on a regular basis.
Why Extra Payments Are Not Always the Best Option
Clearly, there are some great benefits associated with making extra payments on your home mortgage. However, there are also some downsides to consider before you take this step. Your home mortgage may be one of your debts with the lowest interest rate.
For example, many mortgage interest rates today are below five percent while some credit card rates may exceed 15 or 18 percent. Over the long-term, you may benefit more from savings on interest charges by reducing higher interest rate debts. Even if you have no other debts besides your home mortgage payment, you may be able to invest the money for a higher return than the interest rate on the mortgage.
Each person has different short and long term goals as well as a different financial situation to consider. With how low mortgage rates are today, however, many will benefit from paying off high interest rate debts and making smart investment decisions with any extra money they have.
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About the Author:
Babak Moghaddam graduated from University of Southern California in 1985. He entered the mortgage industry as a compliance auditor at the Bank of New York in 1986 and completed his masters in Business Administration two years later. After seventeen years in the traditional mortgage banking world Babak finally transformed this vision into his own practice in 2002 when he formed Charter Pacific Lending Corp, a mortgage company that has provided over $900 Million in residential real estate loans throughout Southern California. Babak and his team do things a little differently than other mortgage providers. They work as financial advisors, because they have come to realize that a mortgage is a very powerful financial tool. And just like any other financial tool, it should be managed as part of the overall financial management plan to reach every home owner’s long and short-term financial goals much faster. You can contact Babak for a free consultation and strategy session at (800) 322-1217 X103.