If you mean do I pay extra toward my principle, then yes. While many financial advisors — and many “armchair” internet “experts” — will tell you not to do this, because you can get a better return in the market, that’s not always the best case. That you have to figure out yourself.
Here’s a couple of reasons to starting paying down your mortgage:
- You don’t have enough equity (the difference between what you owe, and the home’s value). If you don’t have at least 20%, pay it down.
- You’re getting closer to retirement, you’re debt free, and you’re saving at least 10 percent toward retirement. Use the extra funds to pay it down. If you hit retirement with a home free and clear, you’re going to be glad you did.
- Having no mortgage, especially if you’re already retired, gives you the option of using the equity in your home for retirement funds, such as a reverse mortgage. I wouldn’t recommend this for everyone, but it is an option. (Having a sufficient retirement account and income is the best plan.)
I built my retirement house the year I retired. This may seem weird to many, but during my get-out-of-debt phase, I had sold my house — and my rental property, which was not really generating much cash flow— and rented to lower my expenses. I choose to buy a home again to lock in my housing costs, and the added benefit of building just what I wanted. (I assumed that rents would continue to go up, while a mortgage is pretty predictable).
For the last three years, I have used option #1, because I only put 5% down on my VA loan (I could have put more down, buy why tied up all the extra money right off the bat?) However, now that I have reached 80% equity value, I just reduced my extra principle payment so that I’m paying at least as much principle as interest. I don’t need to do this, but thought I’d keep the principle moving downward faster than regular loan payments. And I can adjust the extra principle downward each year. The extra funds can now go back to savings/investments.
The adage that you can earn more in the market than the cost of your mortgage is not necessarily true for everyone. There are many variables: 1) predicted market returns for your portfolio, 2) the current interest rate environment and 3) your mortgage interest rate.
While I choose option #1, at least for the early years of the mortgage, this may not make sense for anyone else. You have to sit down and do the work.
Critical Financial Steps When Buying a Home
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