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Should I Make Extra Mortgage Payments?

Tuesday, July 27th, 2010

As a retirement expert, that’s a question I get asked quite often. People want to know if it makes sense to pay their mortgages down at a faster rate.

If you’re going to get rid of your mortgage within a 5 – 7 year time frame; I say it makes sense to make the extra mortgage payments to get rid of your mortgage.

However, if it’s going to take you longer than five to seven years to get rid of your mortgage, I would advocate NOT making extra principal payments because you’re building what I call dead equity.

Your required mortgage payment is still the same. It doesn’t go down. So when you make extra payments, you’re actually reducing your tax deductions — but you still have to make the same minimum mortgage payment so you haven’t affected your current cash flow in a positive manner.

I’d rather see you just save and accumulate that extra money in an outside fund. And if you look at the payment differential, and take that differential and apply it to, say, an S&P 500 index fund, then the odds are in your favor significantly that at the end of, say, 15 years you would have enough money in your index mutual fund to not only pay off your mortgage, but also have money left over.

So you end up with the same net result. You own your home free and clear in the same amount of time as if you had been making extra mortgage payments, but in the meantime you’ve increased your liquidity, maximized your tax deductions and had money left over. Or, put another way, you end up paying your mortgage off quicker.

So, yeah, if it’s going to take longer than, let’s say seven years, don’t make extra principal payments on your mortgage. Don’t do that bi-weekly mortgage payment program a lot of lenders try to encourage folks to do. Just take that extra cash flow and save it and invest it. You’ll come out a lot better – and worry free – in the end.

Tags: brian Fricke, certified financial planner, finance, financial advisor, Financial Management Concepts, financial planner, Financial planning, retirement, retirement planning, wealth management