By: Tracy Phelan
4 Advantages Of Making Extra Payments To Pay Your Mortgage
Tags: Paying Your Mortgage
4 ADVANTAGES OF MAKING EXTRA PAYMENTS TO PAY YOUR MORTGAGE
If you own your home, you’ve probably already heard that paying extra towards your mortgage loan principal every month or making an extra payment or two every year has some pretty great benefits. This is a reality that many homeowners should take advantage of, and the four advantages of making extra payments to pay your mortgage below are why.
ADVANTAGES OF PAYING DOWN YOUR MORTGAGE
1. YOU’LL PAY LESS INTEREST OVER THE LIFE OF THE LOAN
Everyone knows interest is calculated by the amount and the length of a loan. That being said, the less time you take paying a loan off, the less interest you end up paying. Even though it’s a well-known fact, not everyone realizes the astronomical savings this amounts to when it comes to a mortgage loan.
Here’s an example. If you have a $100,000, 30-year mortgage with a 4.5 percent interest rate, and you pay an extra $100 every month, you will save $26,377.36 in interest over the life of the loan.
This fact alone is enough of a reason to pay down a mortgage, but here’s another.
2. YOU’LL PAY OFF THE LOAN AND BUILD EQUITY FASTER
Obviously, if you pay more each month, you’ll pay the loan off faster. Using the example above, you would shave 8 ½ years off the length of your loan, which helps you quickly build equity you can use later on.
3. YOU HAVE MORE OPTIONS
When you pay extra toward your mortgage, it opens doors that would otherwise be closed to you. For instance, you would be able to take out a home equity line of credit that gives you fast cash for just about anything you need.
As a general rule, you can’t get a home equity line of credit on an investment property, but you still have flexibility when it comes to who you rent to once the property is paid off. You could let someone stay rent-free if you wish because you don’t have to worry about making mortgage payments anymore.
4. YOU CAN REFINANCE EASILY FOR A LOWER INTEREST RATE
This advantage is most useful once the property is paid off, but even before that happens, paying extra sets you up for easy refinancing at lower interest rates to save yourself even more money.
DISADVANTAGES OF PAYING DOWN YOUR MORTGAGE
Now that you understand the advantages of making extra payments to pay your mortgage, it’s important you also understand the downside to making those extra payments. Every mortgage is unique, so you’ll have to weigh your options before deciding whether to put extra cash toward paying yours off early.
1. YOU MAY SACRIFICE LIQUIDITY
Sometimes it’s smart to hold onto your cash. There are instances where paying extra towards your mortgage principal does nothing to increase your cash flow. Here’s an example.
You are a real estate investor with multiple rental properties. You have $10,000 in your investment checking account, and all your properties have paying tenants. You have a total of $600,000 debt, but your lowest loan is just $30,000. Do you put that $10,000 toward paying down that lowest loan? Maybe not.
If that loan is a fixed-rate loan, paying down 1/3 of it won’t lower your payments, which does nothing to increase your cash flow. Yes, it decreases the length of the loan, but as an investor, you’re in it to make money, so it makes no sense to use that money to pay down the loan.
2. YOU DON’T QUALIFY FOR TAX BREAKS
When you pay interest on a mortgage, you can write that amount off on your taxes. The less interest you pay, the less of a tax break you get.
3. YOU MISS INVESTMENT OPPORTUNITIES
Putting your extra cash toward paying down a mortgage takes capital away from future investment opportunities. If you are trying to build a real estate investment company, you need any extra cash for new investment properties.
As you can see, there are several great advantages to making extra payments to pay your mortgage. On the flip side, there are a few reasons you may not want to, too. Assess your situation and decide if it makes sense to use your extra cash to pay down your mortgage.