By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929
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On the surface, it may make sense to hammer down your mortgage balance to become mortgage free as soon as possible. After all, not having a mortgage means you will have more cash flow each month without the burden of mortgage payments.
The only way to pay off your mortgage early is to make more than the minimum principal and interest payments, which you can accomplish by increasing your monthly mortgage payment or making lump sum payments throughout your mortgage term. When you put extra money towards your mortgage, you automatically decrease its amortization period, therefore becoming mortgage-free years earlier.
When mortgage interest rates are low, however; it may not make sense to focus on paying your mortgage down by using your extra cash because your money could earn a higher rate of a return in a savings account or through other investments (provided they are not volatile). Therefore, by using extra cash to pay down a debt that has low interest instead of saving at a higher interest rate, you inadvertently shrink your potential assets.
Something really important to consider is potential unexpected financial problems and what that means for you. If you put all of your cash into paying down your mortgage faster, you may put yourself at higher risk of mortgage default even if you have a small mortgage balance remaining. If you’re unable to pay your mortgage, the bank can launch a power of sale or foreclosure regardless of how much equity you have. However, if you save the extra money and direct it into investments or in a bank account that earns higher interest, you essentially protect yourself against financial distress, mortgage default and losing your home to the bank.
In the end, you can use all the money you save to pay off the mortgage at once instead of using extra cash flow each month to chip away at it. Of course, if your mortgage has a higher interest rate –more than what you would earn in the bank or through other investments, it may make sense to pay your mortgage off early by increasing your payments.
Alternatively, you can balance personal finance using both ideas. You can save your money while also increasing your mortgage payments in order to reduce your amortization period.
Do you need a mortgage plan? I can help you structure your mortgage in a way that helps you free up more cash flow each month.
Please call or write today.
Sarah A. Colucci
Mortgage Agent, Lic. M14000929
Mortgage Edge, Broker 10680
Direct: (647) 773-4849