By Charity Ohlund
I’ve previously discussed the benefits of making a “secret extra mortgage payment” by simply paying half of your monthly payment every two weeks. The biggest benefits of this strategy are paying less in interest and shortening the loan term (paying off the loan sooner).
But, conversely, there could be a few benefits to NOT making an extra payment. Such as….
- Paying off credit card debt
If you’re having a hard time with credit card debt like many Americans, it’s more than likely you don’t have enough available cash to commit to paying extra on your mortgage. Your credit card rates are going to be significantly higher than your home loan interest rate, so it makes sense to tackle credit card debt first. Credit cards typically carry the highest cost to borrow with an average variable interest rate of about 16%.
- Refinancing to a lower rate
This may sound strange to skip paying extra principal and refinance your mortgage instead, but it could prove to save you more and still let you keep the extra money you’d pay toward your principal for other alternatives. The idea is that you may be able to lower your current rate without resetting your term. Your breakeven point could also end up being sooner than you think. Talk with our team at Fountain Mortgage to see if this might make sense for your situation.
- Building up a rainy-day fund
Save for an emergency. We recommend setting aside 3 to 6 months worth of living expenses in savings just in case you lose your job or incur unexpected costs. Without those financial reserves in place, you could put your mortgage in jeopardy, which includes the extra money you worked so hard to put toward it if you’re making extra mortgage payments.
- Investing in the market
You could make more money by using additional principal payments to invest in the market … depending on how long you plan to stay in the home.
Consider how long you plan to stay in your home. If you won’t realize the benefit of making extra payments before you plan to sell the home, investing what you would have paid extra might better choice.
When mortgage rates are low (like they are now), it’s assumed to be at least a couple percentage points lower than what a moderate risk investment portfolio is likely to earn.
This weekly Sponsored Column is written by the employees of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268