You just got a nice pay raise. You paid off a car or your credit cards. This year’s tax refund was, shall we say, generous. Or perhaps you came into an inheritance.
“Found money” like that is pretty awesome, and with it always comes the question, “What do I do with it?” When you own a house or condo, one of your options is paying down your mortgage. Depending on your circumstances, it can be a great idea, or not so much. Here’s a look at how paying more of your mortgage can work for and against you.
Retire debt-free. If you plan to stay put in your home and retirement is on the horizon, paying off your mortgage early (or before retirement) will vastly reduce the expense burden on your fixed income.
Building equity. When you either make a larger, lump-sum payment or pay a bit more each month, you can instruct your lender to apply the money against the principal of your mortgage. Every dollar of principal you pay gets you a dollar closer to owning your home outright—and gives you more equity to borrow against, should the need arise.
Reduce your monthly payment, or shorten the term of your loan. If you’re in a position to make a large lump-sum payment on the principal, ask your loan representative if re-amortizing is worthwhile. For a fee, your lender will recalculate your monthly payment (or the length of the mortgage term) to reflect the lower principal balance.
Bye-bye big deduction. No more mortgage means no more mortgage interest to deduct from your federal income taxes every year. If you’re retired with a relatively low adjusted gross income, the mortgage interest deduction can keep more money in your pocket.
Neglecting high-interest debt. If you carry credit card debt, those interest rates are probably 4 to 5 times your mortgage interest rate. Getting out from under high-interest debt (and staying free of it) is one of the best things you can do to improve your personal financial picture.
You may want that money down the road. You really can’t have too much put aside for retirement and college costs.
Rainy days happen. Your car needs work. The washing machine spun its last cycle. Your BFF asked you to be a bridesmaid (hello, new dress). Or you just can’t put off home repairs anymore. Paying down one debt too much may leave you in another hole.
Financial decisions are almost never cut and dried. Pen Air’s Asset Management team is a great resource for the questions you have now, and for making a financial plan for the future.