Should you make extra payments on your mortgage?
The credit.com website recently ran an article that you folks in the Nashville and Franklin area might be interested in. The author posed the question: Are there any drawbacks to prepaying your mortgage?
Most people will tell you that making an extra mortgage payments is great idea. Why wouldn’t it be? You pay off your mortgage sooner rather than later. Because, from the moment you make an extra payment, the balance of your mortgage is less than it would be otherwise, making each succeeding payment’s interest amount that much smaller. Obviously, at the end of the mortgage’s term, the total amount of interest paid will have been reduced.
But there’s another side to this argument. Paying down your mortgage more quickly “may not be the best overall strategy for your finances,” according to the credit.com’s article’s author, Karin Mueller. She was talking about a consumer who reported paying $6,000 extra toward his mortgage principal, but hadn’t felt fairly compensated by the amount the resulting payments showed.
The reason, according to the article, was that the reduction in the amount of principal owed was so small compared with the amount of the loan that the pennies saved in interest were fairly inconsequential. This might be valid—but in addition to those interest ‘pennies’ saved, the real savings come at the end of the loan’s term, when you are able to retire it months earlier than originally scheduled. And those ‘pennies’ do turn into dollars when you add them all up.
It is here that readers might note that there is a link in tiny type at the top of the credit.com page that says ‘Advertiser Disclosure.’ When you click it, you learn that credit.com is being compensated by some of the financial products discussed. It’s fair to surmise that some mortgage issuers might have decided it is against their interest to encourage Nashville mortgage holders to make extra payments. Despite the further explanation that “this relationship does not result in any preferential editorial treatment,” you wouldn’t be blamed for any slight suspicions that might be raised in that regard.
The article does rightly point out that, no matter what, you should always reserve some cash in the family bank account for emergencies. You don’t want to be using that reserve cash for extra mortgage payments.
The family budget may show your mortgage payment as a minus in the cash flow category, but of course some of that money isn’t really gone—it goes toward building equity: the real estate portion of your net worth.
So, to sum it all up, should you make extra payments on your mortgage? I would say Yes. As long as your financial situation allows you to comfortably do so.