Your mortgage is usually good debt. The interest rate is usually rather low, and there is usually little money to earn from paying off the mortgage. In most cases, it is best to only make the required payments. Below I will explain why that is and when it might be worth making extra payments on your mortgage.
Please note. This article assumes that you have a normal low-interest mortgage. If you are stuck with a high-interest mortgage, a subprime mortgage or similar, then it can be a very good idea to try to eliminate this loan. Start by trying to see if you can get a better lower mortgage in another bank. If you can, you should try to move your mortgage there. If not, you should try to pay it off.
Mortgages are cheap credit.
It is usually not worth paying off your mortgage early. The reason for this is that mortgages tend to be a cheap type of credit. It is usually easy to invest your money in ways that allow you to earn a higher return on your investments than what you pay on your loan. The historical average return on the stock market is over 10% a year. Most banks only charge 2-4% interest on their mortgages. This means that you will earn money by investing your money instead of paying off your mortgage.
Generally speaking, you should never pay down your mortgage if you can earn a high return by investing your money in a low-risk investment. Your net worth will, over time, become a lot higher if you invest this money instead of paying off your mortgage.
The reason mortgages tend to be cheap credit is that a mortgage is a safe investment for the bank since the house is collateral for the loan. If you fail to make your payments, they can take your house and sell it to get their money back. The bank does not want to take your house. They prefer it if you make your payments. This allows them to earn more money. But they know that they can get the money back by seeking the house if they have to. You have the right to the difference if the house sells for more than the outstanding debt.
When to make an extra payment
It is sometimes beneficial to make extra payments on your mortgage to reduce your debts. Below we are going to look at some of the most common situations when it can be beneficial to pay down your debt.
There are several situations in which making an extra payment on your mortgage might be a good idea. Here are a few:
- If you have extra money on hand, such as from a bonus at work or an inheritance, you may want to consider making an extra payment on your mortgage to pay down your debt more quickly if you are unable to find a better investment. This can save you money on interest in the long run.
- If you have a fixed-rate mortgage and interest rates are expected to rise in the future, making an extra payment now can help you lock in a lower rate for the life of your loan.
- If you are close to paying off your mortgage, making an extra payment can help you pay it off faster and save you money on interest.
Before making an extra payment on your mortgage, it’s important to consider your financial situation and whether you have enough savings to cover unexpected expenses. You should also check with your mortgage lender to see if there are any fees associated with making an extra payment.