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