Should you make extra mortgage payments?

Choose the strategy that's best for you

[August 21, 2008 -- OSI Magazine*]
By Tami Dixon, STCU's senior research analyst

Some financial experts advise paying extra toward your mortgage to reduce the interest cost on your home loan.

Is this the best strategy for you? Will you have enough money left over for emergencies, vacations, school fees, utilities, and so on?

First, consider the advantages of paying off your mortgage early. A $150,000 home loan, with a fixed 7 percent annual percentage rate, would rack up about $210,000 in interest over 30 years. If you paid an additional $150 per month, you would pay off your loan 10 years faster-and save around $76,000 in interest!

Homeowners can enjoy similar savings by choosing a 20-year mortgage. That same 7 percent loan would cost you an extra $165 each month, but you would save $80,000 in interest.

Some homeowners don't pay extra on their mortgage because they want to maximize their mortgage interest tax deduction.

For most people, however, the tax break won't outweigh the advantage of having extra cash in your pocket when you pay off the mortgage and own your home outright. (Consult your tax adviser or financial planner.)

Second, consider whether you can afford to pay off your mortgage early. Pre-paying your mortgage can create problems if you need that extra money in the future to satisfy other obligations such as credit cards, personal loans, and other unsecured debt.

What if you broke your leg in a ski accident and couldn't go back to work for several weeks? What if you lost your job unexpectedly? Would you be able to meet all of your financial obligations, including your mortgage payment? If not, paying extra on your mortgage may not be worth the risk.

If you've paid off your unsecured debt and have a rainy day fund for emergencies, then consider paying extra on your mortgage. It takes discipline to make that happen.

Pre-pay your mortgage

Here ar four easy ways to make extra payments at STCU:

  1. Put additional principal payments on autopilot by setting up an automatic monthly transfer from your checking account.
  2. Pay more at any time at any STCU branch location or by calling (509) 326-1954 or (208) 619-4000. Be sure and explain that you want to make a "principal-only" payment.
  3. Set up automatic bi-weekly payments from your STCU account. Over the course of a year, this will equal 13 payments instead of 12.
  4. Double up on payments once or twice each year in the month of your choice.
All of these options are available at STCU, with no prepayment penalty. Other mortgage companies may charge you a prepayment penalty, so check first before accelerating your payment plan.

It's your choice. If you have the discipline and can afford it, extra mortgage payments may be your quickest road to financial freedom.

* This article was first published in the summer 2008 edition of OSI, the quarterly magazine for STCU members. Read the entire OSI magazine here.
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