Aug 16 2009

On not making extra mortgage payments

First, I’ve gotta remind y’all that I live in an apartment and I’ve not yet had a mortgage. Further, if you’ll check out my sidebar, you’ll see that I’ve only got about 6 percent of my down-payment fund saved. I’m a long way from getting a mortgage.

While I have all this time on my hands, I figured I might as well contemplate whether paying extra on our mortgage might be a good idea for us.

My initial conclusion is that, no, we will not be making extra payments on the mortgage.

Our goal is to get a 15-year mortgage with the largest down payment we can manage. If you run the numbers on a 15-year vs. a 30-year, you’ll see that you’ll pay substantially more interest on the 30-year (without extra payments).

Some people advise to go ahead and get the 30-year and make payments as if you had a 15-year. Their reasoning is that you’ll have extra cash available if you run into financial hardship and need to temporarily stop making extra payments. Fine in theory, but in practice? It might take more willpower than I have.

I think I’d rather have that 15-year and just get on with it. Plus, if we get a 15-year mortgage within the next few years, I’ll have a paid-for house while my son is in college. Handy thing, that.

The monthly payments will be more, but as long as we aren’t buying too much house a 15-year shouldn’t be a problem.

An exception: If we can’t swing a 20 percent down payment, then we’ll make extra payments until we have 20 percent in equity to get rid of PMI.

But why not pay extra on the 15-year mortgage and pay it off even faster?

Good question. I’m not opposed to paying off a mortgage faster. You’ll save money on interest and you’ll be out of debt. You’ll be able to put your mortgage payment toward other things.

But rather than send money along with my monthly payment, I’d rather put that money in a savings account or buy some CDs or the like.

When we have enough saved to pay off the mortgage in one fell swoop, we can decide at that point whether to pull the trigger and do it.

Until then, I think paying extra is taking on a bit of risk. And I’m rather risk-averse.

You see, if your house is 90% (or 70% or 50% or whatever) paid off but you lose your job and exhaust your emergency fund, you could lose your house to foreclosure. You paid all that money extra, and will never see it again. Big stink!

If you had put all those extra payments into savings, you’d have extra ¬†funds which you could tap and ride out the storm and keep your dwelling.

If you’re going to pay extra on your mortgage, be sure that you have a fully loaded emergency fund and all your other debts paid off first. Then, make sure you’re adequately saving for retirement. Then, and only then, start chipping away at your mortgage if you so choose.

Some people would do better to send extra money to their mortgage lender rather than put it in savings. For them, having the cash out of their hands means they won’t blow it on something frivolous.

Others might prefer to have extra cash on hand.

Another group might prefer doing a little of both, and making one lump extra payment per month or per year, while still contributing to savings.

The best choice just depends on your personal situation and how you treat your money.

Are you paying extra on your mortgage? How? How’s it working for ya? Here’s what others have to say on the topic:

Mortgage payoff: Lump sum or monthly? @NoDebtPlan

How to pay off your mortgage early @ Five Cent Nickel

Should you prepay your mortgage? @ Get Rich Slowly

9 Responses to “On not making extra mortgage payments”

  1. We’ve always paid a little extra towards our mortgage.

    Mathematically, it makes sense to pay off your highest-interest debt first (The debt-snowball idea of the lowest-balance debt first is totally psychological) For us, our mortgage rate was higher than our other debt (student loans), but we went with the debt-snowball strategy. Since last summer when we’ve had no other debt besides the mortgage and an emergency fund we’re comfortable with, we started working to pay off the mortgage more quickly. This month we paid the minimum due to our No-Spend Month, but a more typical month, we’ll overpay by about $350. A CD or savings account may give more security, but won’t get the same rate of return.

    A side note: When we got our house, the best rate we could get was with a state program that only offered 30-year mortgages. By paying over the minimum, we’ll be able to pay it off in less than 15 years- while we still have the option of dropping back to the lower mortgage payments if times get tight.

  2. We have a 30 year mortgage – but we’re paying like it’s a 15 year. It’s not tempting for us because that higher amount is listed in our budget each month. Emergencies aside, I just write a check for the same (higher) amount each month. We also try to send an extra $100-200.

    I agree with you on emergency funds – we have about six months of bare-bones expenses saved up in CDs. (That includes our actual mortgage payments, not excelerated payments.) I don’t think I’d feel comfortable paying ahead on the mortgage if we had no savings!

  3. If you qualify you might want to take a look at the USDA Rural Development loans. Just google Rural Development. You dont have to have a downpayment and you dont pay PMI. Check it out. We used it, as I am disabled and my dh doesnt make over the alloted amount.

  4. We have a 15-year mortgage. We don’t pay too much extra on it, we just round up the payment a little. Since we get paid bi-weekly, though, we end up with two paychecks a year where the mortgage wouldn’t have to come out. We send those half-payments along with the next payment anyway!

    It IS tempting to send more money each month since we’re about 30 years old and only have 9 years (max) left on the mortgage! Since I’ll stay home once (if) we have kids, though, we’ve been sending most of our savings to our “new cars fund” and our “home improvement” fund.

    It’s pretty crazy to think that by the time our first child hits about 7 (if plans go well!), we should be mortgage-free!!!!

  5. We are paying extra on our mortgage. Its rather simple for us. We got a 30 year mortgage knowing we would have a child soon and our income would decrease greatly since I made more than my husband and was planning on staying at home as long as possible. For the first few months we made minimum payments. We had some other debt as well as the strain a child has on the income. Then my husband got a promotion. While he is making less than many, it was a 40% increase in income for us. We paid off the small amount of debt we had and began paying extra toward our house.

    Months where we do not have surprise expenses, and extraordinary spending, we pay twice our mortgage payment. Its essentially paying 6-8 times the principle. While we know that we can’t pay that much every month (things like having a child and school tuition impact things) if we did we could pay our mortgage off 23 years early. Our goal is to pay the mortgage off 20 years early. We might not live here that long, my husband might lose his job, nay other things could happen to affect that. But, if my husband does lose his job, and there is not one in the foreseeable future, he will work minimum wage if necessary and we will refinance the house. We figure the more equity we have the easier it will be to do so. Even if we get a higher interest rate. Its not ideal, but its one heck of a cushion.

  6. We pay a little extra but not much. We have a pretty good emergency fund I think but I like seeing a larger number in my savings account versus owing less on the house.

    I don’t now if we’ll be in our house for a lot longer, so I hate to make extra payments. Sometimes I think that may be a stupid way to look at it. :/

  7. We pay almost $300 extra each month on our 30 year mortgage. If we keep that up, it will be paid off in about 20 years (we just refinanced). We carry no other debt and have a 6-month emergency fund, so we’re pretty set there. I tend to want to put every extra penny toward our mortgage since ING’s savings and CD rates have gone down drastically in the last year. My husband would rather have a 1 year “emergency” fund, which would also encompass things like buying our next vehicle outright. We’ve decided to look at our savings at the end of each year and decide if we want to make an extra chunk payment then. Also, we’ll increase our monthly payment anytime Scott gets a raise. Hopefully, all that will add up to owning the house in 15 years, or just before we send our son off to college.

  8. We paid off our house in less than five years and have contracted an umbrella insurance policy to protect our main asset. Although the house has gone down quite a lot in value, the feeling of security in a paid-for home, and the knowledge we’ve saved over $100K in interest, is priceless.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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