Reblogged from ABC News – Alex Veiga
It’s a strategy that crosses the mind of many borrowers when they take on a home loan: Make an extra mortgage payment or two every year and save tens of thousands of dollars in interest.
The move can shave off costs for a home loan and ensure it’s paid off faster. Even one additional payment a year can translate into big savings.
On a $250,000, 30-year mortgage with a fixed rate of 4 percent, making an extra payment every year would save the homeowner roughly $27,724 over the life of the loan. It would also cut the amount of time needed to pay back the loan by four years and one month.
Even so, there are potential financial drawbacks to consider. Borrowers who can afford to make extra mortgage payments tie up cash that could be put toward retirement or used for emergencies.
"It’s really important to look at your financial health in the broader sense," said Suzanne Martindale, staff attorney at Consumer Union. "The most important thing is to maintain in good standing all of your debts."
Here are some tips to consider before taking steps to make extra payments on your home loan:
1. WEIGH YOUR PRIORITIES
It may be tempting to double down on your mortgage payments, but doing so before you’ve taken care to shore up your finances overall isn’t a good idea.
Financial advisers recommend ensuring that you are saving for retirement and have set aside three to six months’ salary to cover emergencies. If you have children, you’ll also want to put saving for their college tuition ahead of making extra mortgage payments.
"At today’s low mortgage rates, if you are cutting into your retirement savings to pay off a mortgage, you are likely making a mistake," said David Mullins, an independent financial adviser in Richlands, Virginia. "You don’t want to have your nest egg tied up in a property where you can’t easily convert it to cash."
>> Read the full article here: http://abcnews.go.com/Business/wireStory/making-extra-mortgage-payments-pay-off-41452102
The views expressed are my own and do not necessarily reflect the views of my employer.
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