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While many people hate to have debt, it’s a part of life for the majority of people who buy a home. And paying down that mortgage is a great feeling, especially if you can contribute a little extra toward the principle every now and then. But putting extra money you may have toward your mortgage isn’t always the smartest thing to do. Here are some ideas of when to do it (and the best way to it) and when it might be a good idea to put that money elsewhere.
First of all, you need to accept the fact that debt in the form of a mortgage is a GOOD thing. Sure, it would be nice if homes were cheap enough that we could pay cash for them, but that‘s rarely the case for anybody. It’s important that you realize this because there are people who hate being in debt so much, that they will contribute every extra penny they can muster toward getting that mortgage paid off. That is not always a good thing.
Let’s say you have a 30-year-fixed-rate mortgage with 7% interest, and you decide to contribute extra money toward the principle of that mortgage. You’re basically making 7% on that cash you are contributing. Now let’s
say the stock market, through individual stocks or mutual funds, is returning an average of 20% per year. If you put that extra cash in the stock market rather than into your home, your return would have far more money to your name in the long run. Even a conservative stock fund earning 10% per year would be better. And don’t forget the tax write-offs that go with a mortgage.
So when do you contribute more toward your home? If the economy is down, in a recession, you may want to be a little more conservative with your money for a while and pay down your mortgage a little bit. Or maybe you’ve only got a year or two left on your mortgage and just want to finish it off...nothing wrong with that. Of course, your interest rate is certainly a factor. If you have an adjustable-rate mortgage that keeps going up significantly every year, you may want to get the principle paid off quicker. Every situation is different. Just make sure that the extra money you are contributing toward your home is less than what you could make in another investment.
Paying more toward your mortgage is simple. Just send a separate check along with your normal mortgage payment to the company that holds your mortgage. Make a note on the check that says “apply toward principle.” There are two things to be aware of. One is to be sure that you are not penalized for paying off your loan early. This isn’t very common anymore, but there are some financial institutions that will penalize you for paying off your mortgage early (because you are cutting into their profit...which is the interest you pay each month). The other thing is that many companies will offer to LET you set up a plan to pay extra toward your mortgage each month...for a fee, of course. Unless you are extremely undisciplined, there is no reason to pay them for this. Sending in an extra check as mentioned above does the same thing, and you don’t have to pay anybody for it.
Remember, a mortgage is a good debt to have. Interest rates are usually low, and a mortgage allows you to purchase a home that you could never afford on your own. Just make sure if you do pay off that mortgage early that it’s the best place possible to be putting your extra cash for your long-term financial well-being.
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