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Don't Pay Extra On Your Mortgage

By
Real Estate Agent with Keller Williams Realty

Paying extra on your mortgage sounds like a great plan. In the right circumstances it can be. Too often however I meet people who pay extra on their mortgage without any specific financial plan in place.

At least until you are sure it is a smart move. I write this the day after listing a home for sale. They paid extra every month on their home which is still a short sale. The worst part...they are also filing bankruptcy because their credit card debt is overwhelming. Implementing the right financial plan would probably have saved them from both disasters.

Before paying extra on your mortgage I would recommend you talk with a good financial planner to make sure this is the best strategy for building wealth. When I ask people why they do this I usually get one of two responses. Either they are trying to build equity or they are trying to save interest on the back end of the loan. Indeed mortgage amortization tables make this look like a great idea... shave years off your mortgage, etc.

Before you do this consider a few factors...

  • Mortgage interest is the only tax deductible interest. For most Americans this is the single biggest write off. If you are in a 25% tax bracket and have a 6% interest rate on your loan, your net effective interest rate is close to 4%.
  • You don't build wealth by paying extra. You technically have more equity becuase you owe less but you actually paid the extra amount directly. Basically by doing that you are paying into a savings account that is not paying you interest. Weath is only "built" through appreciation which happens independent of what you owe.
  • New changes in the mortgage industry make it much harder to access the equity in your home. If your money is tied there you may not be able to get it out without selling.
  • Before paying extra, make sure your higher interest loans are paid off. Credit cards, car loans, etc. If you think the amortization schedule on a mortgage is scary, you should see one on a 20% credit card!!
  • Have your money working for you in more than one place. If you put your extra money in your home, it is only appreciating in one market segment. Be disciplined and pay the same amount to another investment. The advantages to this are many including easier access to that investment and being more protected in case of market changes.

I am not saying it is never a good idea to pay extra on your mortgage. There is great freedom in being debt free. What I am saying is consider your overall financial plan using the help of a professional financial advisor before taking such action. Your home is but one part of a sound financial plan.

For anyone in the Indianapolis area, I would be happy to provide you with the contact information for some incredible financial advisors!

If you are considering buying or selling a home in the Indianapolis area, the Borushko Team of Keller Williams Realty would love to help!

Want to get an idea of the value of your home?  Sign up for a free Market Snapshot which will tell you whats going on in the real estate market in your area!!

Posted by

                    

The Matt Borushko Team - Carmel Indiana Real Estate

Keller Williams Realty

Certified Distressed Property Expert

www.realestateproindy.com

317-843-8739

 

 

Show All Comments Sort:
Joe Harvey
Lake Worth Real Estate - Lake Worth, FL

Great info..I agree 100%

Jul 22, 2010 02:51 AM
Nell Lindner
American Realty, Lake Jackson, TX - Lake Jackson, TX
Brazosport Area Specialist

Matt-- This is great advice! Too many people are not aware of many of the things you pointed out.

Jul 22, 2010 02:53 AM
Associate Broker Falmouth MA Cape Cod Heath Coker
https://teamcoker.robertpaul.com - Falmouth, MA
Heath Coker Berkshire Hathaway HS Robert Paul Prop

Interesting scenario. I would consider the idea that equity is the difference in what is owed and what is owned. Thus, it can be "built" if what is owed is reduced. It may not be a positive number if you still owe more than you own, but I think that appreciation is not the only way to acquire equity. If values stay the same, and you are reducing your debt on a property, your equity will be increased.

Jul 22, 2010 02:55 AM
Randy Ostrander
Lake and Lodge Realty LLC - Big Rapids, MI
Real Estate Broker, Serving Big Rapids and West Central MI

That is great information Matt. If some of them would have taken the extra they paid in and made other payments maybe they wouldn't be in such a bad place. No one size fits all, each needs to be tailored to the person looking at their finances.

Jul 22, 2010 03:11 AM
Don Spera
CR Property Group, LLC - East York, PA
Serving York and Adams County, PA

I fully agree.  Everyone's circumstances are different, on the way they like to live, travel, entertain, kids college, etc...

Jul 22, 2010 03:31 AM
Nicole Kraus
Signature Realty Associates - Dover, FL

Great information, but what if you have not debt other than your home, would it not be wise to pay if off then?  Also that is odd that the clients mentioned continue to make extra payments if they are filing for bankruptcy.  That makes no sense?

Jul 22, 2010 03:33 AM
Matt Borushko
Keller Williams Realty - Carmel, IN
Carmel, Fishers and Noblesville Realtor

Joe, Nell, Randy, and Don... Thanks for reading and for your comments.

Heath, you are correct that equity is the difference between what you owe and what something is worth. I meant you don't build wealth by paying extra which is definitely different. I have made that correction...thanks for pointing that out!

Jul 22, 2010 03:34 AM
Matt Borushko
Keller Williams Realty - Carmel, IN
Carmel, Fishers and Noblesville Realtor

Nicole,

Thanks for the comment. I believe I stated that it isn't always a bad thing to pay off your mortgage. Before doing that you need to make sure it is the best move. Are you better off paying extra on a mortgage that is tax deductible or investing in tax free Municiple Bonds that yield 7 percent. If you put them in the Muni you actually still have the tax deduction and your money can grow with both the house and the bond as one example. My point is that people should incorporate a sound financial strategy with the help of professionals before they make decisions that don't look at the whole picture.

As far as my couple goes, they made a bad purchase decision (over paid for the neighborhood..not using me) and were making extra mortgage payments for 3 years while racking up credit card debt. If they would have paid all that extra into the credit cards, the credit cards would be almost zero balance right now. They would still be upside down in their home but that would be an unrealized loss only felt if they had to sell. Now everything has spiraled out of control for them and they are behind on everything. Tough to see!

Jul 22, 2010 03:57 AM