How to Know If You Should Make Extra Mortgage Payments

By Roman Shteyn

NEW YORK (Credit-land.com) — Every homeowner looks forward to having a mortgage-burning party. A home loan is usually the largest portion of one’s debt burden, and it’s a big relief for many when they are free of it.

It provides a great emotional lift, which is why some personal finance experts suggest that you pay off the debt quicker by making an extra mortgage payment or two each year. This way, they say, you could pay off a 30-year mortgage in 22.5 or even 20 years. But is such a step the best option for everyone? How do you know?

Here are a few points to consider:

What is your current interest rate?

Interest rates are at historic lows. While paying off your mortgage in record time might be great for the ego and provide much emotional relief, you might be better served taking that extra payment or two and investing it more aggressively for a better return if you have a competitive mortgage rate. Remember, at the end of day the goal is to save money and make your money work for you — even if it means paying on your mortgage for a longer period.

What’s the value of your home?

If your house is underwater and is projected to remain so for the next several years, you would still have to bring money to the table when you sell the house. Making additional mortgage payments is an excellent idea if the housing market is steady and robust. But if the real estate market where you live is soft, you could be wasting your money.

How long do you plan to stay in your home?

The United States remains a very mobile country, which means a lot of people who take out 30-year mortgages rarely stay for the life of that mortgage. Sometimes it’s because things happen — you lose your job, the neighborhood changes or property taxes soar. But many times it’s also by design. So if you plan is to stay for a short while — say, five or six years — there’s no wisdom in paying down the mortgage unless you’ve got plans to hold on to it after you move.

What impact will it have on your tax situation?

Lower interest payments or the absence of a mortgage could make it impossible to make some important tax deductions. High interest payments tend to be more prevalent at the beginning of the life of the mortgage. Depending on the size of your mortgage and interest payments you could be looking at tens of thousands of dollars in deductions each year. Losing these deductions could significantly affect your tax returns.

What’s the state of your emergency savings account?

Many financial advisers say you should have enough money set aside to cover about six months of your basic expenses in case of emergencies such as job loss or illness. If you don’t have these funds set aside, it doesn’t make sense to make the extra mortgage payments. Doing so will deprive you of your savings and may force you to take a personal loan at a higher interest rate if you do have an emergency.

Do you have high interest credit card or personal loan debts?

Unlike mortgages, these debts are not tax deductible and the interest payments could end up costing you a lot more if you don’t pay them down aggressively. If you are saddled with high interest personal loans and credit card debts, it makes more sense financially to pay those off first rather trying to pay down your low or moderate interest mortgage.

Roman Shteyn is co-founder of Credit-land.com. He writes frequently on personal finance and credit-related topics.

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