Paying extra torwards your principle balance on your mortgage can be quite a blessing. However, it entirely depends on your individual situation, your goals, and your financial discipline and attitude. It is not for everyone, but it will certainly bring peace of mind. Here are some reasons that I would recommend that someone should pay extra on their mortgage:
1. You already have a 3-6 months Emergency Fund. Before paying ANY money towards the principle on your mortgage, it is well advised to have an emergency fund that can cover 3-6 months of your typical monthly expenses. You’ll want the emergency fund there in case you lose your job or some other emergency situation because it’s a lot more difficult to pull money out of your house if you actually need it!
2. You have extra money sitting around to invest. If you can get a better INFLATION-ADJUSTED AFTER-TAX GUARANTEED RATE OF RETURN that is higher than your current mortgage interest rate, then that is where you should invest. However, I have yet to find such an investment. Paying off your mortgage early gives you a GUARANTEED rate of return equal to the mortage interest rate for the remaining term of the mortgage. Even when adjusting for inflation, paying off your mortgage will yield a higher return than investing in the stock market.
3. You have paid off all other debt with higher interest rates. If you have other debt that has higher interest rate than your mortgage (maybe credit cards, auto loans, school loans), then you need to work on paying off that debt first.
4. You have already taken advantage of your company’s 401(k) match. Most workplace plans have matches, typically 50% of every dollar you put in up to 6% of your pay. If you’re not contributing enough to at least get the full company match, you’re leaving free money on the table (and missing out on an immediate 50% return). Using a company match is fairly a safe way to invest. If stock prices drop drastically like they have in last quarter of 2008, at least you still have your initial principle.
5. You want extra FREEDOM. Can you imagine the freedom of not having that mortgage payment hanging over your head each month? If you paid it off (and eliminated your other debt), you could live debt-free. Plus, you’d only have to earn enough to pay for your basic necessities: food, heat, electric. Not to mention the added cash flow of what once was paid to the bank that can now be used for enjoyment. Imagine the possibilities this would open up for you! Quit your job and start a business. Travel around the world. Live the good life.
6. You want LESS STRESS in your life. Believe it or not, having a mortage (the biggest monthly expense for most people) can be quite stressful. Not having a mortage payment would mean significantly less stress in your life. You wouldn’t have to worry as much about losing your job, for instance.
7. You want safety and peace of mind. Once you’ve paid off your mortgage debt, you truly own your home. This means you always have a place to go. Owning your home is a safe investment for the simple reason that you always have shelter. Sure, you might earn more by investing the money elsewhere, but then again you might not. Paying off a mortgage is a guaranteed investment.
Another Option:
Some people are negative towards paying off a mortgage early because they claim that you do not have the liquidity during the 10 to 15 years to pay off a 30 year mortgage, thus no security. (that is the reason for having a 3-6 month emergency fund). But if you are really paranoid about the need for liquidity, you can do what one couple did: Put the extra money in a high-yield savings account or CD, and then when the savings balance has reached your principle balance on your mortgage, pay off the mortgage in one lump sum. It yields a similar result to directly paying down the principle, but still provides the desired liquidity.
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