By Cal Haupt, president and CEO of Southeast Mortgage
In Samuel Coleridge’s epic poem, “The Rime of the Ancient Mariner,” the narrating sailor details a stalled voyage on the sea: “We stuck, nor breath nor motion; as idle as a painted ship upon a painted ocean.”
Our debts weigh us down, and can make us feel trapped. In times of economic uncertainty our debts feel heavier. To borrow another famous image from Coleridge’s poem, debt can feel like the albatross hanging around your neck.
Some homeowners, concerned with their debt, have begun making extra payments on their mortgages. Paying off debt is smart, but prepaying your mortgage isn’t always a good financial decision. Whether or not to pay off your mortgage early depends on a variety of factors, including your age, other debts, and mortgage rate, among others. Here are a couple factors to consider when deciding whether or not to prepay your mortgage.
• Debt you owe on a home isn’t classified as a “bad debt.”
Despite what the markets have done over the past few years, take a long view. Homes generally appreciate over the years. The interest you pay on your mortgage is typically tax deductible, too. Consider paying other debts, such as money owed on credit cards or on student loans. Interest on credit card debt grows quickly, while the items purchased with your plastic card usually depreciate in value.
• Think about opportunity costs.
Extra payments towards your principal might be better spent in an investment. If investing money will bring at least a 3 percent higher return than paying the mortgage early, invest. Do you have enough money put away in case of an emergency or unemployment? Remember that a savings account is a more liquid asset than a house, and that you should strive to always have enough put away to see you through six months in case of a crisis. Young families with children have childcare and education expenses to budget for; it may be beneficial for such a couple to keep mortgage payments as low as possible. Conversely, empty nesters may benefit from extra payments.
• Carefully weigh all the benefits and potential downsides to accelerating payments on your mortgage.
Calculate how much interest you can save. Before you decide to make extra payments towards your principal each month, speak with a financial advisor. Otherwise, you could end up hurting your overall financial health.