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The Financial Corner - Feb '18


Happy February everyone!! This is the second installment of twelve monthly blogs on financial information useful to buying or selling a home. This month’s Financial Corner topic is Should You Make Extra Payments on Your Mortgage. Hope it provides you with useful information.


Should You Make Extra Payments on Your Mortgage?

You are probably looking forward to the day that you own your home free and clear. Paying off your mortgage early can save tens of thousands of dollars in interest and take years off your loan. However, before you send your extra cash to your mortgage lender let’s look at the benefits and risks of making extra payments.


Benefits of Making Extra Payments

There are definitely benefits to making extra payments on your mortgage, especially since savings rates for money market and savings accounts are historically low these days. Here are

a couple of benefits:


 Save on Interest. Interest is calculated on your remaining loan balance, so paying additional principal payments early in the loan will greatly reduce the total amount of interest over the life of the loan.


 Shorten the Length of the Mortgage. Making additional principal payments will shorten the life of your mortgage and build equity faster.
As an example, if you make an extra payment of $200 per month on a 30 year $200,000 loan, with a 4% interest rate, you will save approximately $45,000 in interest and pay it off 8 years
and 5 months early.


Risks of Making Extra Payments
The risk of making extra mortgage payments means that your extra funds are tied up in your home and they may not be available for other needs such as:


 Emergency Fund. Do you have 4 to 6 months living expenses in savings that you can withdraw quickly if a family emergency arises? Without this financial cushion, you could lose your home and the additional payments you made to pay down the mortgage balance.


 Paying Off High Interest Debt. If your credit card interest rate is 15% and your home loan interest rate is 4% you will save a lot more by making extra payments to the high interest credit card. Plus, mortgage interest is deductible from your taxable income, whereas credit card interest is not.


 Retirement Planning. Are you contributing to your employer’s retirement plan? If your employer matches all or part of your contributions to a 401K, you should put in at least enough to take advantage of the matching benefit. If not, you are leaving “free money” on the table.


With today’s mortgage rates hovering around 4%, a mortgage is most likely the cheapest money you will borrow. If your finances are in good shape and you have extra money each month, then paying down your mortgage may be for you. But remember, there are more advantageous alternatives - such as maintaining a “rainy day” fund, paying down high interest debt, and fully funding your retirement account.