Don't Pay Extra On Your Mortgage

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!

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