As homeowners, we often dread the first of the month when that large payment is due. Then we hear how some people voluntarily make that payment bigger by, gasp, paying extra to principal! While paying extra to principal may pinch your pocket a little further it does pay dividends down the road.
First things first, if you have a low interest mortgage and have outstanding high interest debt you should probably pay those down first. It is always a numbers game and your debt, whatever it might be, with the highest rate should usually be your first priority.
Some out there recommend against paying your mortgage early because you get the tax benefits of claiming interest. While this is true, the benefits are often not as good as they seem. Standard deductions for married folks are 11,400. Therefore, unless you can claim more interest than that you are not receiving any benefit. Also, keep in mind the amount of interest you pay decreases each year…
You need to view paying the mortgage down early as part of your overall investment portfolio. You are essentially going to receive a percentage of growth in your portfolio for each year you cut off your mortgage. The growth is due to not spending the money on interest! That growth percentage is whatever your rate is. The great part about it is this is a no risk investment unlike the stock market. As always talk to your financial advisor about where you should be investing your money, but investing in your house might be a good choice for the stable piece of your portfolio.
Some advanced investors will bring up that you are sinking your money into a source that is not liquid. This is very true and you should not use your home as the only savings plan, you should always have liquid piece of your portfolio ready for emergencies. Provided you have that cushion in place, then paying extra to principal might be right for you.
There are many ways to pay extra to principal and a popular option is send a little extra with every payment but you can also send it yearly if that makes you more comfortable. One easy way to see if this is right for you is to use a mortgage calculator. Then talk to a trusted financial advisor to get you on the right track!