Paying down your mortgage doesn’t have the same clear advantages as it once did. So, many people are wondering when they should get serious about paying down their mortgage. However, these days there are a few things you should consider before you start paying down your mortgage. Therefore, I have a list of financial priorities that you may want to consider first if you have a low interest rate on your mortgage.
When to get serious about paying down your mortgage:
Emergency Funds: Do you have an emergency fund put away? You may want to consider saving up at least 6 months worth of living expenses in case you lose your job. That will help float you until you find another job.
Credit Cards: Look into paying down your high interest rate credit cards. If you have credit cards with 18% interest and a mortgage with 3.5% interest, it makes more sense to pay down the credit card first.
Your Retirement: Are you putting money into a retirement fund? Your home is a great investment; however, so are other funds like IRA’s, 401K’s or something similar. You can seek the assistance of a financial advisor for help in this area.
Kids and School: You can count on college being expensive unless your child gets a full scholarship. Even with scholarships there are a lot of out of pocket expenses. A savings account that will fund these extra expenses can be very beneficial when the time comes.
Once you have done the above steps, if you decided they were for your best interest, it’s time to look at paying down your mortgage. Your goal should be to pay down your mortgage by the time you retire. When you’re on a fixed income after retirement it will really help your financial situation if you don’t have a mortgage payment.
If pay extra on your principle before your mortgage is 20 years old, you will save thousands in interest. After your mortgage turns 20 years old, you will be paying much less interest and more of your payment will be going toward the actual principle of the loan. This method can help you pay off your mortgage before you retire.
You will have to decide how fast you want to pay it down and how much extra you can actually afford to add to the current payment. If you pay an extra $100 toward the principle it will pay down your loan $1,200 a year faster. Or, you can look at it this way, paying $200 extra toward the principle for 5 years will have you paying it down by $12,000 in that short time. So, the more you can afford, the better off you will be. You can pay off your mortgage early and save thousands on interest.